Brussels (Brussels Morning Newspaper) – The European Central Bank is satisfied with the current rate of interest and deems any inflation rate that falls below 2 per cent to be temporary, said Luis de Guindos, the bank’s Vice President, on Thursday.
As reported by Reuters, inflation, which has been just above the ECB’s 2 per cent target for the majority of this year, is expected to fall below the target next year. Some policymakers fear inflation expectations could shift to permanently low levels, similar to the years before the pandemic.
How confident is the ECB in its inflation forecasts?
“If (undershooting) happens, it will be something that is going to be temporary,”
de Guindos said.
“We can be comfortable with the present level of interest rates,”
he said.
“I think that convergence to 2% without any overshooting or undershooting is now the main baseline scenario for projections,”
de Guindos also stated.
According to De Guindos, recent inflation data has been encouraging and the decline in service price inflation, which has been a persistent component of the price basket, has also boosted the ECB’s confidence in its forecasts.
De Guindos said that policymakers were now “marginally” more optimistic about growth and saw the bloc on track for the ECB forecasts.
What factors support the ECB’s current interest rate stance?
Another source of the ECB’s comfort with inflation is the solid growth readings we have seen over the past couple of weeks. While the figures are not stellar, they do show that the 20-nation bloc is expanding at a rate of 1% or slightly above, in a range that is approximately consistent with potential.
According to reports, Financial investors largely agree, but still price in a small probability of further easing of policy to avoid inflation dropping too far below target. While the odds of a cut in December are seen as almost zero, investors continue to see a 40% probability of a cut by mid-2026.
How stable is the eurozone economy amid moderate growth?
Last week, it was revealed that the European Central Bank held interest rates steady for the third time in a row, in spite of worries that a fairly slight recovery throughout the eurozone would cause inflation to increase.
The ECB stated that its governing council of 26 members’ view of inflation was “broadly unchanged” and stated,
“the robust labour market, solid private sector balance sheets and past interest rate cuts by the governing council remain important sources of resilience.”
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