Poor advisor for monetary policy
The new forecasts from the European Central Bank (ECB) seem to confirm those who want to see interest rates cut sooner rather than later. The central bank assumes that inflation will be significantly weaker in 2024 than was presumed in December. In addition, demand from companies and private individuals is also likely to exert less inflationary pressure this year than has been assumed at times. The ECB has also lowered its forecast for economic growth in the eurozone.
But be careful: the ECB should not look too closely at these forecasts when steering its monetary policy. For one thing, the basic assumptions for the forecast could turn out to be wrong. For instance, oil prices could be significantly higher than assumed in the scenario – for example, if the Middle East conflict were to escalate. In general, the ECB forecasts are very sensitive to market changes. Last but not least, the assumed money market interest rate also plays a key role. If the ECB loosens its monetary policy more than expected this year, the new forecasts would be yesterday's news anyway.
No scope for an interest rate cut in April
Of course, the ECB's projections are still important information. They give an indication of where inflation and economic growth will be in the absence of exogenous shocks. That is the crux of the matter: roughly and not exactly. Even if the assumptions in the forecasts prove to be correct, it is not possible to deduce exactly where inflation will lie in the coming months – that is the nature of forecasts.
If the ECB is not prepared to accept that inflation may remain slightly above the target value of 2.0% up to and including 2025, then it cannot look too closely at forecasts when considering interest rate cuts, but must evaluate „hard“ facts. Otherwise, it runs the risk of having to raise key interest rates again, which would entail high economic costs. One of the most important facts will be the wage data for the first quarter. However, these will not be available until the end of May.
The ECB emphasizes from meeting to meeting that it wants to achieve its inflation target of 2.0% „in the near future“. A mere approximation of around 2% is not enough – for credibility reasons alone. It should therefore not risk lowering interest rates in April despite lowered forecasts.
