(Source: "Southern Financial All Media" 2024-07-20)

On July 18, the European Central Bank held a monetary policy meeting and decided to keep the three key interest rates unchanged.

The ECB announcement shows that the main refinancing interest rate, marginal lending rate and deposit mechanism interest rate will remain unchanged at 4.25%, 4.50% and 3.75% respectively. The interest rate decision is in line with market expectations. In its announcement, the ECB said it would not pre-commit to a specific interest rate path and reiterated that it would "rely on data and a meeting-by-meeting approach."

European Central Bank President Lagarde emphasized at the press conference that internal inflation is still high, and wages, profits, and geopolitical factors pose upward pressure on inflation risks, and it is expected to fall back to the 2% target in the second half of next year.

Many interviewed guests said that the European Central Bank’s “no action” this time is mainly due to the fact that the European economic outlook is still unclear. However, the European Central Bank has entered an interest rate cutting cycle, and there is a high probability that it will make mild interest rate cuts in the future.

At the monetary policy meeting held in early June, the European Central Bank decided to cut interest rates by 25 basis points. This is the first time the European Central Bank has cut interest rates since it stopped raising interest rates in October 2023.

The downward path of inflation in the euro area remains unclear

At the monetary policy meeting held in early June, the European Central Bank decided to cut interest rates by 25 basis points. This is the first time the European Central Bank has cut interest rates since it stopped raising interest rates in October 2023. Many market analysts question whether the European Central Bank's decision to cut interest rates is premature, as the outlook for the European economy and inflation remains uncertain. This pause in interest rate cuts seems to confirm this statement.

Liu Ying, researcher at the Chongyang Institute for Financial Studies and Director of the Cooperative Research Department of Renmin University of China, said in an interview with Southern Financial All-Media reporters that three factors affected the European Central Bank's interest rate decision. First, the current inflation level in Europe has not yet dropped significantly; second, the European economy has been affected by many factors, including continued geopolitical conflicts and the Fed's unmoved monetary policy, so the European Central Bank is not in a hurry to cut interest rates; third, the European economy is currently showing an overall growth trend, causing the European Central Bank to maintain the three major interest rates unchanged.

Eurostat released data on July 17 showing that the final CPI in the Eurozone rose by 2.5% year-on-year in June; in May it rose by 2.6% year-on-year; the core CPI excluding energy, food, tobacco and alcohol in the Eurozone rose by 2.9% year-on-year in June, both in line with expectations.

Li Yingting, a researcher at the Bank of China Research Institute, analyzed that although the euro zone's harmonized CPI fell by 0.1 percentage points in June from May, it was still higher than the 2.4% in April. Among them, the year-on-year growth rates of food prices and energy prices were 2.4% and 0.3% respectively, down 0.2 and 0.1 percentage points from May, which were the main reasons for the fall in inflation. Service prices and industrial product prices were 4.1% and 0.7% respectively, the same as in May.

She pointed out, “It is worth noting that in terms of member states, there are large differences in the inflation levels of euro area member states.” For example, Belgium’s adjusted CPI year-on-year growth rate increased from 1.5% in January to 5.4% in June, while Finland’s inflation rate dropped from 1.1% in January to 0.5% in June. Among the major member countries, the adjusted CPI of Germany and France both rose by 2.5% year-on-year in June, Italy's inflation rate was 0.9%, and Spain's inflation rate was 3.6%, with growth rates second only to Belgium.

It can be seen that the inflation rates of Germany, France and Finland dropped in June compared with May, but the inflation rates of some other member countries are still increasing. Looking forward to the second half of the year, the path of inflation in the Eurozone remains unclear.

Li Yingting said that observing the trend since 2024, it can be seen that the space for inflation in the Eurozone to fall has been narrow, and future performance will largely depend on the trend of service prices. Food prices and energy prices, which contributed significantly to the fall in inflation in the early stage, are less likely to fall further - energy prices have returned to slight growth from a sharp year-on-year decline, and food price growth has fluctuated during the year but has basically returned to the long-term average. Service prices in the Eurozone are highly sticky, especially in areas such as transportation and medical health, which increased from 3.5% and 2.9% in January 2024 to 4.3% and 3.6% in June respectively.

Liu Ying analyzed that the current world structure is not stable, and the election results in many countries are unpredictable, so there are many fluctuations. For example, the price of gold recently hit a record high, exceeding US$2,470 per ounce, which has also brought many challenges to price stability in Europe.

However, Liu Ying believes that the European Central Bank has entered an interest rate cutting cycle and will most likely continue to take interest rate cuts in the future.

Ding Chun, director of the Center for European Studies at Fudan University and president of the Shanghai European Society, also believes that the European Central Bank is making progress in cutting interest rates, but it is difficult to see a large-scale reduction. As relevant economic indicators do not exceed expectations, a relatively mild interest rate cut is expected in September.

IMF raises Eurozone economic growth forecast for 2024

On July 16, local time, the International Monetary Fund (IMF) raised its economic growth forecast for the euro area in 2024 in its "World Economic Outlook Update". Thanks to improvements in the service sector, Europe is showing signs of economic recovery.

According to the latest forecast, the economic growth rate of the Eurozone this year and next will be 0.9% and 1.5% respectively, which is 0.1 percentage point higher and the same as the forecast three months ago. However, Europe's two major economic locomotives still lack momentum - Germany's growth rates this year and next are expected to be 0.2% and 1.3% respectively, both unchanged from the forecast three months ago; France's growth rates are 0.9% and 1.3%, respectively, 0.2 percentage points higher and 0.1 percentage points lower.

Just returned from academic research on industrial economics in Western EuropeZhao Yongsheng, researcher at the National Institute for Opening-up at the w88 casino and doctoral supervisor at the Sorbonne University in Paristold reporters from all media of Southern Finance that judging from on-site surveys and inspections, the economy of the Eurozone and the entire EU has basically hit bottom and is recovering.

"Although the growth rate has only been increased by 0.1 percentage points, which is relatively small, in recent years, the economic growth rates of the European Union and the Eurozone have basically been at 1% or less than 1%, and the economic growth rates of various countries are roughly the same. Therefore, if calculated based on the 1% benchmark, the increase of 0.1 percentage points is not small. Looking at the overall trend, the International Monetary Fund has adjusted its expectations."Zhao YongshengWeigh.

Zhao Yongshengbelieves that various countries in the Eurozone have introduced a series of policy tools, which have had a good effect in boosting economic recovery. From the perspective of the troika of investment, consumption, import and export, investment plays a major role, and in the future, the government will play an increasingly important role in stimulating the economy in the form of increased investment.

Data shows that from April to June 2024, the quarterly average of the comprehensive purchasing managers index (PMI) of the 20 euro zone countries was 51.6, a slight increase from 49.1 in the previous quarter. At the same time, consumer confidence in the Eurozone recovered moderately from April to June, rising from -14.7 in April to -14.0 in June.

Li Yingting said that whether the Eurozone economy will rebound depends on the performance of several major countries. Judging from the economic data performance of Germany in the second and third quarters, it is likely to maintain an improving trend; in France and Italy, against the background of interest rate cuts, their domestic consumption and investment are expected to further boost, so the situation is improving.

At the same time, Li Yingting added that Spain is a better-performing member of the Eurozone, and tourism is an important area that drives the Spanish economy. With the arrival of summer, the demand for tourism is relatively strong, and the Spanish economy will receive a partial boost.

“The European Central Bank’s interest rate cuts may indeed lead to economic divergence in the euro area countries.”Zhao Yongshengpointed out that due to the different economic conditions of various regions, interest rate cuts are more beneficial to some regions, especially those emerging industries that are in the stage of capital demand, such as digital industry, artificial intelligence industry and new energy industry. These industries have a huge demand for capital, and even a 0.5 percentage point or just 0.1 percentage point cut in interest rates will have a significant stimulating effect.

“Economies that integrate more quickly with emerging economies will be the first to benefit from the European Central Bank’s interest rate cuts.”Zhao YongshengAdded.

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