The summer has seen waves of speculation on whether central banks on both sides of the Atlantic will be able to reduce interest rates over the balance of the year – and if so how quickly. In the case of the European Central Bank and the US Federal Reserve Board it is now time to get on with it. Inflation data clears they way for reductions in borrowing costs which, even after they are cut, will still remain restrictive. The most significant risks now are of keeping interest rates too high for too long.
In Europe, figures last week showed that the euro zone inflation rate fell to 2.2 per cent in August, down from 2.6 per cent in July. This is now approaching the ECB’s 2 per cent target. Inflation in the services sector remains high at 4.2 per cent, though this may have been affected by French data relating to the Olympics.
The ECB already reduced interest rates once in June and a further quarter point cut in its key deposit rate can be expected next week when its policy-making central council meets. More cautious members of the council have cautioned that the ECB needs to see ongoing proof of an easing of inflationary pressures. But the flip side of the argument is that not moving raises the risk, in the words of the ECB chief economist, Philip Lane, of “chronically below-target inflation” in the medium-term, as happened for a prolonged period after the financial crash.
For this reason financial markets expect the cut to proceed in September followed by one, or possibly two more over the balance of the year. Likewise, in the US, Jay Powell, the chair of the Fed, has clearly indicated that he anticipates the first cut in its key interest rate for four years to take place this month too. Data on Friday showed one of the Fed’s favoured measures of inflation holding steady at 2.5 per cent in July.
Ditch the plastic and buy loose fruit and veg to save money and waste
‘I’m not weird. He is.’ Why does one word rattle Donald Trump so much?
Oppressive regimes and first love: Key teenage themes captured in September’s best YA fiction
Is 15 too young for independent travel? Or are day trips just grand?
Central bank policymaking is not a perfect science. The long lags it takes for interest rate changes to have their full impact ensures this is the case. However, the balance of risks now suggests that the time has come to move, offering some fresh respite to borrowers.