Germany: No ECB interest rate reduction is expected before June, despite the fall in inflation in March

The trend to reduce rates continues in , as the rise in consumer prices slowed to 2.2% in March, according to the announcements made today (02.04. 24) the Federal Statistical Office based on a preliminary assessment. Economists involved in a Bloomberg data provider survey expected this amount to be reduced according to national calculations (CPI). In February, goods and services in Germany cost 2.5% more than a year ago. The core of inflation has also decreased, but only slightly. Now it’s at 3.3% for the year. Among other things, this does not include energy prices, which have fallen extremely sharply. Food prices are also not included in the equation, as they have not increased so sharply recently, notes Handelsblatt. The European Central Bank (ECB) target is 2% inflation. This objective is getting closer and closer to other European countries. In France, inflation slowed to 2.4%, stronger than expected, according to the country’s statistical service. In Italy, the interest rate was below the ECB’s target for some time: in March, it was 1.3%, according to official data. The prospect of an impending return to inflation rates close to 2% is likely to push the ECB to start a recovery in interest rates soon. The interest rate decision in June is considered the possible date for the first interest rate reduction. Before that, the Governing Council will meet on 11 April (p. ECB President Christine Lagarde, and other top central bankers have not completely ruled out a first step down as early as next week. Nevertheless, it would be a big surprise: not one of the experts interviewed by the Reuters news agency expects it. According to Ulrich Wortberg of Landesbank Helaba, the new inflation figures should “confirm the ECB representatives in their assessment not to start reducing interest rates very quickly”. Overall, however, the figures do not support the interest rate reduction in June. For Ulrich Kater of Dekabank, the beginning of the interest rate recovery in June “is becoming increasingly likely”. Less companies plan price increases An additional indication of a steady decline in inflation was given by the Institute Ifo today (02.04.24). He investigates companies every month about their price expectations. According to the report, the percentage of companies that can predict price increases continues to decrease. This applies particularly to retail trade and gastronomy. At the beginning of the year, restaurant businesses had to face the refund of the VAT rate from seven to 19%. This was felt by their visitors in the form of higher prices. This effect was an important factor that caused temporary inflation growth in January. Now it seems to be largely over. “Inflation continues to decline and is likely to fall below the two percent limit in the summer,” predicts Timo Wolmmershäuser, who is responsible for financial affairs at the Ifo Institute. “From the German side, there is nothing to prevent the ECB from reducing interest rates soon”. The bottom could be reached for now However, it is not certain that inflation will continue to decline steadily and will soon fall below 2%. Michael Heise of the HQ Trust asset manager, for example, argues that the fall to 2.2% “was probably the low growth point in 2024”. Heise mentions as a reason the persistently high price increases for service providers. “This mainly reflects the highest wage cost”. In fact, the only vaguely predictable wage dynamic is an important reservation of the Governing Council of the ECB. Recently, the increase in collective wages has slowed down somewhat. However, it is still over four percent, which is beyond the levels at which most central bankers feel comfortable in terms of price stability. Therefore, they want more evidence that wage pressures are retreating.