Last week, after a years long rally of increases of its reference interest rates, ๐๐ต๐ฒ ๐๐๐ฟ๐ผ๐ฝ๐ฒ๐ฎ๐ป ๐๐ฒ๐ป๐๐ฟ๐ฎ๐น ๐๐ฎ๐ป๐ธ (๐๐๐) ๐ณ๐ถ๐ป๐ฎ๐น๐น๐ ๐ฑ๐ฒ๐ฐ๐ฟ๐ฒ๐ฎ๐๐ฒ๐ฑ ๐ถ๐๐ ๐ฟ๐ฎ๐๐ฒ๐ ๐๐ถ๐๐ต ๐ฎ๐ฑ ๐ฏ๐ฝ๐. Weโll summarize the reasoning behind this decision.
โ Whenย reading this article, keep in mind that the primary role of the ECB is to control inflation at a rate close to 2%. Primary data to monitor this are the current level of inflation, the inflation outlook and the costs of labour.
The past months ECB kept on communicating the following:ย
๐ท It will decrease reference rates in June 2024ย
๐ท Interest rate decisions are purely data driven
What do data tell us?
โพ Inflation does not decrease anymore, is even tending to increaseย
โพ The inflation outlook is showing an increasing inflation till the end of 2025ย
โพ Cost of labour did not decrease and even increases
What were the reasons given for reducing the interest rate?ย
โพ We said we would decrease in June, so we decrease in June!ย
โพ The inflation outlook is maybe not positive on the short term, but the outlook end of 2025 is stableโฆย
โพ Nevertheless the data, we have confidence that the inflation will decreaseโฆ
๐ง At Ernest Partners we needed a bit of time to debate and digest these arguments guiding the decision to reduce the reference rates. Inflation and related market data signals a stand-still in interest rate would have been a rational decision. And yes, the European economy is growing at a very slow pace, and markets and governments would not have liked such a decisionโฆ
โณ Time will tell if the gut feeling of ECB directors steered the inflation and the economy in the right directionโฆย ย
