THE European Central Bank (EKT) is expected to leave key interest rates unchanged next Thursday, January 25, with interest in the meeting turning to whether there will be any indication of when they will begin to reduce.

The President of the ECB, Christine Lagarde, had avoided after the previous meeting in December making any mention of a rate cut, saying that it was too early for such a thing and that decisions would be made on the basis of data on the course of inflation and the economy in general.

However, last Wednesday Lagarde said a summer rate cut was likely when asked on the sidelines of World Economic Forum in Davos for the possibility that there would then be the necessary majority that would support such a move. He added, however, that there is still a level of uncertainty as there are individual price indices that have not fallen to the desired level.

With this statement, the president of the ECB defied investors’ expectations that the first reduction in interest rates will begin in April and will be followed by a series of corresponding moves in the coming months. Markets were discounting that the total rate cut in 2024 would exceed 150 basis points, meaning that there would be a total of six cuts of around 25 basis points. each one. After Lagarde’s rebuttal, they “gathered” their forecasts somewhat, but again gave an 80% chance that the first move would take place in April, while they expected a total decrease of 138 bp. in 2024. More conservative in their forecasts were the economists who participated in his surveys Reuters and Bloombergwho expect the ECB to cut interest rates for the first time in June and to reach a total of 100 bp.

In favor of the view that the first reduction in interest rates may take place in the summer, some important officials of the ECB have expressed themselves, such as the chief economist, Philip Lein and Bundesbank President Joachim Nagel. However, given that the time until the summer is long, it does not seem likely that there will be any relevant official announcement (in the form of forward guidance) next Thursday.

On the contrary, the central bank will probably want to keep all possibilities open, insisting that its decisions will be made on the basis of available data and mainly the path of Eurozone inflation towards the medium-term target of 2%. Since the last meeting, inflation rose to 2.9% in December from 2.4% in November, a development that was expected due to the discontinuation of support measures for energy prices by some countries and base results. Therefore, the increase in inflation is not a particularly worrying factor. On the other hand, the Eurozone economy was likely to have slipped into recession in the second half of 2023 – GDP fell by 0.1% in the third quarter and is likely to contract again in the fourth quarter based on current surveys – which would facilitate a decision to cut interest rates.

Also on the ECB’s radar will be the potential impact on inflation and the economy from the disruption of maritime trade due to attacks by Yemen’s Houthi rebels on ships in the Red Sea. Due to the decision of many shipping companies to transport goods from Asia to Europe by taking the much longer route via South Africa, freight rates have skyrocketed and the delivery time of goods has increased by around 10 days, leading to fears of further increases in the prices.

According to her study Oxford Economics, global inflation may rise by 0.7 percentage points at the end of 2024 if shipping companies avoid the Red Sea for several months and freight rates remain at twice their pre-crisis levels in the region. This impact does not seem large, but it may slow down the decline in inflation, influencing the ECB’s decisions on interest rates.