Interest rates will not be cut this week by the European Central Bank (ECB) at its last policy meeting before the summer break. This was expected, after a reduction in May, taking borrowing costs down from a record high. But what will be vital will be the signals given by the central bank about the possibility of further reductions later this year. And here there is some new uncertainty.
There had been an expectation that following the June cut of a quarter of a percentage point the same might be in prospect for September. Now, however, there are some doubts. Some ECB council members remain worried about inflationary risks and the results of the French election has given pause for thought. While the formation of a government remains uncertain, there appears little prospect of French action to cut its budget deficit, which was 5.5 per cent of GDP last year, and a chance that populist measures to make matter worse could be part of any deal to form an administration. More spending or lower taxes, by injecting more cash into the economy, could fuel inflation.
France is one of seven EU countries subject to a European Commission process for countries whose budgets are out of line. Warnings to countries to abide by the euro zone fiscal rules can be expected at Thursday’s meeting. Meanwhile, on Monday euro zone finance ministers, meeting in Brussels, noted that “a gradual and sustained fiscal consolidation in the euro area continues to be necessary” given the need to “reduce the high levels of deficit and debt.”
Paschal Donohoe, the Minister for Public Expenditure, who chairs the Eurogroup, noted that phasing out the once off supports and energy credits introduced to tackle the cost of living crisis would do much to get national exchequer back on track. This, however, may not be easily achieved.
Bodies by Christine Anne Foley: a slippery, shape-shifting story about the indignities of modern dating
Trump shooting suspect: FBI finds few red flags on would-be assassin
Do you often tell people how busy you are? Here’s why you should stop
Ireland v South Africa: ‘When you get a win like that it makes your summer. It’s not an exaggeration’
The ECB has time on its side. Also, the inflation data suggests that price pressures continue to ease and the general economic environment remains mixed. Given the high level of interest rates, there should be scope for measured continued interest rate reductions later this year. There may be some risks in doing so, but the risks in not moving could be even greater.