In the face of market-leading expectations of interest rate cuts, the European Central Bank** warned that the rebound in inflation is expected to persist and that rate cuts may not happen anytime soon.
On Wednesday local time, European Central Bank Vice President Luis de Guindos (De Guindos) said in a speech in Madrid that the downward process of inflation is expected to slow down this year, and inflation will continue to rise at the beginning of the year.
Many economists** eurozone inflation will reach its 2% target this year, but the ECB does not expect it until the third quarter of 2025.
Data released in January showed that the Eurozone CPI increased from 24% rebounded to 29%, indicating that the ECB is still some way from a rate cut cycle that the market is aggressively pricing in. However, embarrassingly, De Guindos also admitted that the eurozone economy will contract in the fourth quarter, and that two consecutive quarters of economic contraction mean a technical recession, and the economic outlook is weak in the near term.
Given the danger of a recession, the eurozone should perhaps cut interest rates sooner rather than later, but the problem is that inflation has not yet returned to the 2% target level, and the eurozone is facing a dilemma.
De Guindos did not say what a possible recession would mean for monetary policy, stressing in his speech:
"Future decision-making will continue to follow a data-dependent approach to determine the appropriate level and duration of restrictions. ”De Guindos expects the Eurozone CPI to follow a similar path to Spain, which fell below 2% in June 2023, but rose above 3% in the last four months of last year as the energy subsidies were phased out.
He stressed:
Positive energy-based effects will begin to emerge and energy-related subsidies will expire, which will lead to a temporary pick-up in inflation.Dutch bank ING pointed out that De Guindos's comments about the recovery of inflation reduced the probability of a rate cut by the ECB in the first quarter, and the probability of a rate cut in March was pulled down again.
The Eurozone economy is widely expected to recover modestly this year due to falling inflation and wages**. The European Central Bank last month** saw Eurozone economic growth set to grow from 01% accelerated to 04%。
But De Guindos was skeptical, saying growth was "disappointing" and that economic activity was slowing, with the construction and manufacturing sectors particularly affected.