“The ECB should cut interest rates from the first quarter of 2024”

The Governing Council of the European Central Bank (ECB) decided today to keep the key interest rate constant. Here is a statement from Marcel Fratzscher, President of the German Institute for Economic Research (DIW Berlin):

The European Central Bank's decision to keep interest rates constant is understandable. However, the ECB has missed the opportunity to send a clear signal for a change of direction in monetary policy. Monetary policy is far too restrictive; it is the biggest brake on economic recovery in the Euro Area and in Germany in particular.  

Inflation is falling much faster than expected. This also applies to core inflation; inflation expectations are well anchored. The weak economic development worldwide and particularly in Europe is the main reason why inflation is falling so quickly. The biggest risk of inflation remaining too high is likely to be wage developments, as employees have a strong negotiating position and will try to at least compensate for their considerable real wage losses in recent years.  

The ECB should now change course quickly. Under the current conditions, an initial rate cut in the first quarter of 2024 and further rate cuts in the course of 2024 would be justified and necessary. The neutral interest rate, at which monetary policy neither supports nor slows down the economy, is around 2.5%. This means that interest rates in the euro area are still two percentage points too high. The ECB now needs courage and determination to change course.