The European Central Bank (ECB) followed its latest policy-making meeting yesterday by repeating that interest rates would stay high for “as long as necessary.” ECB president Christine Lagarde, when asked at the press conference following the meeting, did not repeat an early statement that she believed interest rates would not change for the first half of next year, rather saying that any decisions would be data-dependent. However, she added that the governing council had not discussed when interest rate cuts might happen.
Perhaps they had a quiet word at the coffee break, because the financial markets are now pricing in a succession of interest rate cuts in 2024. As things are evolving, the question is not whether interest rates will fall next year, but when the decline will start and how rapid it will be.
As the ECB points out, all the inflation indicators are not yet where it wants them to be, notably wage growth. However, headline euro zone inflation has fallen sharply and the ECB has cut its own forecasts for the years ahead. The months ahead may see bumps up and down in inflation figures, partly for technical reasons. But at some stage in 2024 interest rate cuts will become inevitable, a point acknowledged on the other side of the Atlantic by the US Federal Reserve Board following its meeting earlier this week.
One point is worth bearing in mind here. The level of interest rates which neither stimulates nor dampens economic growth is a matter of some debate, but it is certainly a lot lower than where they are now . This means that the ECB can cut interest rates from current levels secure in the knowledge that they are still dampening growth and combatting inflation until they fall to much lower levels.
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Given the long lags monetary policy takes to operate, making these judgments is as much art as it is science. Indeed, there is a significant risk that the ECB has already gone too far, too fast, risking an unnecessarily sharp downturn in economic growth. On this, only time will tell. And the ECB will argue that the risks of inflation getting embedded at high levels means it is better to be safe than to be sorry.
For the Irish economy, the prospect of somewhat lower interest rates is good news at a time when domestic economic growth is slowing. When interest rates fall, those holding tracker mortgages will benefit immediately. However, those rolling off fixed interest rates mortgages will still face higher borrowing costs than they have been used to , even if the rates they move on to do start to ease a bit as the year goes on.
Lower inflation, too, is good news , even if the actual level of prices remains well above that which prevailed before the inflationary surge started. The outlook for 2024 for households is improving, though gains will be slow to emerge.