Members of the European Central Bank’s governing council generally feel obliged to make comments on interest rates when they appear in public settings. And the media is never slow to ask them. Partly as a result of this, the ECB’s communications strategy has appeared confused in recent months, as battles over what happens next are fought out in coded pronouncements.
Irish central bank governor Gabriel Makhlouf was the latest to give his view, saying at an event yesterday that an interest rate cut in December was not yet “in the bag.” In relation to the prospect of a cut of a full half point in interest rates at the meeting – recent reductions have been of a quarter point –Makhlouf said the evidence of falling inflationary pressures would have to be “pretty overwhelming” for that to happen.
While the financial markets will parse comments from Makhlouf and other members of the ECB’s governing council for any hints, it is clear now that the trend in interest rates is downwards. Inflation has been falling fast, even if it remains stubbornly high in parts of the services sector. And while the key part of the ECB mandate relates to price pressures, it must also take account of economic growth and here the picture in the big euro zone states has been weak.
As Makhlouf noted, the ECB can only set interest rates based on what it sees and cannot at this stage speculate on the likely impact of the election of Donald Trump as US president. On one side this could hit economic growth further by setting off a damaging trade war. On the other, were tariffs to be imposed on goods entering the EU from the US – or elsewhere – then this could add to price pressures in some areas.
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With little scope for most EU governments to boost spending, the onus is on the ECB to help to support economic growth. And there are reports of concern in the governing council in terms of the outlook. Against this backdrop, another interest rate cut looks likely in early December and – for now at least – the outlook for 2025 is for more of the same.