The communication from the European Central Bank after the meeting of its central council yesterday was notable for its tone. ECB president Christine Lagarde continued to insist that talk of interest rate cuts was “premature” and to suggest that she saw summer as a more likely time to start to reduce rates than Spring. But her comments were broadly positive on inflation, saying that it was declining in line with ECB expectations and that while wage growth remained a concern there were some positive trends here too.
It was a simpler message than the ECB has tried to deliver after recent meetings – and all the better for that. Everyone understands that the central bank has to walk a narrow line, trying to get inflation under control while not keeping interest rates too high for too long. And so saying that future decisions will be based on data as its evolves is reasonable, even if insisting that interest rates would stay high “for as long as possible” is a largely meaningless statement.
The ECB will probably err on the side of caution, but there is no doubt that it anticipates lower interest rates as the year goes on. Investors will continue to debate whether the first cut will come in April or June. But for borrowers the main issue will be how much interest rates might be cut this year and in 2025. This will depend on the path of inflation and of the euro zone economy; even the ECB itself will not yet have a set game plan. It will be interesting to see if, in the days ahead, divisions appear in the public comments of members of the governing council on the likely timing of rate reductions.
In terms of the Irish economy, Lagarde’s comments are likely to keep the cost of State borrowing at a relatively low level, albeit now higher than during the decade up to the pandemic. For businesses and mortgage borrowers the prospect of lower interest rates comes closer, though they would be best to base their plans on a slow, if probably steady, pace of reduction. And to understand that the era of super-low interest rates from which many benefited are not coming back.