The European Central Bank (ECB) is considering further ECB rate cuts despite rising inflation in the Eurozone. Inflation reached 2.4% in December, surpassing the ECB’s target, but the bank remains optimistic about achieving its 2% goal in 2024. Divided opinions among policymakers highlight the challenges of balancing economic growth with inflation management.
Rate Reductions Likely Despite Rising Inflation
The European Central Bank (ECB) is preparing for further interest rate cuts at the end of January, even as inflation in the Eurozone has risen. Inflation increased to 2.4% in December, up from 1.7% in September, surpassing the ECB’s 2% target.
ECB Executive Board member Isabell Schnabel attributed the rise to temporary statistical effects, suggesting it does not indicate a lasting shift. She maintained that further rate reductions remain possible if inflation follows projected declines.
“If inflation drops as expected, there is room for additional rate cuts,” Schnabel told Finanztip. However, she acknowledged the ECB is approaching the limits of how much further rates can be lowered. Over the past year, the bank has reduced its deposit rate by one percentage point to 3% through four steps.
Schnabel expressed optimism that the ECB could achieve its 2% inflation target in 2024. Yet, she flagged persistent inflation in the service sector, driven by higher labor costs, as a key concern. Slower wage growth, prompted by the weakening economy, may help ease this pressure.
Divided Opinions Among ECB Members
Minutes from the ECB’s December meeting reveal differing views among policymakers on the scope of rate cuts. Some advocated for a more aggressive 0.5% reduction to address the economic slowdown, while others preferred a more cautious approach.
Robert Holzmann, governor of Austria’s central bank, remains a vocal critic of further easing. He warned that cutting rates while inflation is temporarily rising could undermine the ECB’s credibility. “Reducing rates amid rising inflation risks damaging trust,” Holzmann said in an interview with Politico.
Holzmann emphasized that the decision at the January 30 meeting should be guided by inflation data for January, which will be available on February 3. While financial markets expect a 0.25% rate cut, Holzmann stressed that the move is not assured.
Striking a Balance Between Growth and Stability
The ECB faces a challenging task of balancing the need to stimulate economic growth with managing persistent inflation risks. Policymaker divisions highlight the complexities of navigating these priorities, as the Eurozone grapples with economic uncertainty and inflationary pressures.