The European Central Bank may keep rates higher for longer as it tackles inflation

The European Central Bank is dealing with both unprecedented inflation and a slowing economy.

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The European Central Bank is set to raise interest rates again on Thursday, with Frankfurt policymakers shifting their focus to core inflation and trying to predict when too high consumer prices might ease.

Inflation in the Eurozone has eased over the past few months as energy prices have fallen. But core inflation, which eats away at energy and food, is rising at a steady pace.

Paul Hollingsworth, chief European economist at BNP Paribas, said in an interview: “Given that the economy is more resilient to energy shocks and the labor market remains tight, we think that price pressures from the services sector will last a long time.” It takes time to materially decrease. A recent research note

The Eurozone economy is more resilient than expected and even avoided contraction in the final quarter of the year. France and Spain recorded growth that offset the decline in production in Italy and Germany.

The fear of stagnation subsides

Meanwhile, the International Monetary Fund upgraded its growth outlook for the global economy for the first time in a year, citing China and steady US demand. This should benefit the Eurozone as well as China and the United States, which are the largest export destinations of the Eurozone countries.

“Gas inventories are up and gas prices are down. Inflation is coming down and uncertainty is coming down,” Mark Wall, ECB supervisor at Deutsche Bank, said in a recent research note. We have removed it from our 2023 forecast.” Customers

Wall Street’s base expectations suggest the ECB will taper by 50 basis points this week, 50 basis points in March and 25 basis points in May, ending with a final rate of 3.25%. We expect rates to remain on hold until mid-2024, when the European Central Bank begins cutting rates by 25 basis points per quarter, until interest rates return to neutral in 2025.

Fight against inflation

Another big issue for the ECB this week will be quantitative easing – the shrinking of the balance sheet and what the euro zone central bank wants to achieve with this policy.

Societé Generale’s Anatoly Annenkov said in a recent research note that the bank could use a more rapid reduction in its balance sheet to help fight sticky inflation.

Financial stability considerations may prevail now and support a slow start, but if the ECB fails to make progress on core inflation, many governors are likely to look differently by the end of the year, Annenkov said.

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