EU 동향

 

 

By the end of the pandemic, pent-up demand and supply chain disruptions had sparked inflation, prompting major central banks to raise borrowing costs. Likewise, while transitioning into a new normal, the food and energy shock caused by the Russian-Ukrainian War led these banks to hike interest rates, hoping that the aggressive measures would offset the general rise in prices.[3] This was partly because the European Union (EU) was heavily dependent on Russian gas, which accounted for 45% of EU natural gas imports in 2021. The fear of gas shortages due to the war elevated inflationary expectations, contributing to a headline inflation of 10.6% in October 2022.[4]

In the midst of this macroeconomic volatility, the ECB underwent two phases, according to Lagarde. The “first phase” involved “robust and rapid tightening” of monetary policy by raising rates by 450 basis points between July 2022 and September 2023. It then transitioned to a “holding phase” until rate cuts on June 6th. Each phase halved inflation, decreasing it to 5.2% at the ECB’s September 2023 meeting and to 2.6% in May 2024.[5] Meanwhile, a survey compiled by S&P Global and Hamburg Commercial Bank highlighted that in May, both aggregate output in manufacturing & services and business confidence reached their peaks. With unemployment levels at a record low, the ECB had enough statistical evidence to predict a 0.9% economic growth in the eurozone this year, 1.4% in 2025, and 1.6% in 2026.[6]

Citing such improvement, after maintaining the policy rates high at 4% for nine months, the Governing Council of the ECB decided to cut them to 3.75%. This decision was voted for by all but one of the 20 national representatives in the ECB, based on three criteria: the inflation outlook, the dynamics of underlying inflation, and the strength of monetary transmission.[5] In addition, the ECB’s decision aligns with that of Canada’s central bank made a day before, which is the first G7 country to make a cut in interest rates. Like Canada, Switzerland, and Sweden, the ECB claimed that the decision was an attempt to keep inflation at 2% over the medium term. This would put the ECB slightly ahead of the Federal Reserve and the Bank of England. However, as they move forward, the ECB may have to be circumspect on the timing of rate cuts by the Federal Reserve, which are expected later this year, since it is highly undesirable for them to lose the euro’s value against the dollar, which may result in a skyrocketing price of imports and thus inflation.[7]

There are several domestic ramifications resulting from this rate cut. First, the purchasing power of households has increased, but it is unlikely that this will be of high benefit since both household debts within the eurozone are structured in a rate-insensitive manner, and aging demographics contribute to the prevalence of savers. For instance, households’ propensity to hold secured debt is largely influenced by inflationary expectations, income, age, and institutions. In contrast, rate cuts may pave the way for increased investment in capital stocks as businesses move away from tight borrowing conditions, according to Dimitris Valatsas, an analyst at Aurora Macro Strategies.[8]