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The European Central Bank achieved interim success in fighting inflation, will gradually lower rates

TraderKnows
TraderKnows
06-27

Recently, researchers analyzed the current state of the European Central Bank in a paper, stating that the fight against inflation has achieved interim success, allowing for optimism.

The European Central Bank faces an "easy pass" in the final mile of combating inflation and can continue to slowly lower interest rates. This viewpoint will be presented by two researchers to the ECB's top officials next week.

The research paper by Giorgio Primiceri and Domenico Giannone will be unveiled on Tuesday at the ECB's annual conference, held at a mountaintop resort near Sintra, Portugal.

Using a model that deconstructs inflation into supply, demand, and the impact of monetary policy, the researchers concluded that inflation is gradually returning to the ECB's 2% target unless new shocks occur.

Primiceri and Giannone wrote in their paper: "This analysis indicates that we can be optimistic about inflation both in the short and long term."

"In fact, our model predicts that the 'final mile' will be relatively easy over the next few quarters."

ECB Governing Council member Isabel Schnabel previously warned that after a sharp drop in energy prices helped bring inflation down from a peak of 10% at the end of 2022 to 2.6% last month, "the journey of the last mile of inflation" would be "the most arduous."

However, the paper argues that even if the policy rates drop from the current 3.75% to 2.5%, inflation will fall to the ECB's target next year and remain there until 2026. This aligns with market expectations.

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Inflation

Inflation refers to the phenomenon where the purchasing power of a country's (or region's) currency decreases, leading to a general rise in the prices of goods and services. It is reflected in the fact that, over a certain period, the same amount of money can only buy fewer goods and services.

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