Opinions Joost Derks
Interest rates will continue to fall soon
The European Central Bank will cut its policy rate again next week. Now that inflation is under control, the focus shifts to reviving the very weak economic growth rate in Europe.
According to preliminary figures from data collector Eurostat, inflation in the eurozone reached 1,8% in September. The European Central Bank (ECB) has managed to reduce inflation to below its 2% target after more than three years. That seems like a great achievement when you consider that inflation shot up from less than 2021% to more than 2022% between the beginning of 1 and the autumn of 10. However, it would be going too far to attribute the current tame inflation entirely to smart central bank policy. It also helped considerably that global goods flows got going again in the period after the pandemic, which eliminated all kinds of artificial shortages.
Tough job
In fact, the hard work for the ECB is only just beginning. Because it will be a major challenge to map out a policy that will sufficiently stoke the fire under the European economy. In the second quarter, the growth rate was only 0,2%. In itself, it is no news that economic growth within the eurozone must be searched for with a magnifying glass. That growth is namely entirely determined by an increase in the working population and an improvement in productivity. Due to the ageing of the population, the working population is already slowly but surely decreasing. In the meantime, productivity in the eurozone is increasing much less quickly than in, for example, the United States and China, where companies embrace new innovations much more quickly.
Foot off the brake
Last month, former ECB President Mario Draghi put his finger on the sore spot in an extensive report on Europe's competitiveness. In addition to closing the innovation gap, he points to opportunities in the transition to a sustainable economy and securing important supply chains. Addressing these three themes is a matter for the European Commission and national governments. The ECB can do little more than create a monetary climate in which inflation is under control and economic growth is slowed down as little as possible. By cutting the policy rate next week, central bankers are, in a sense, taking their foot off the brake a little more.
Interest rates down further
It would be strange if there was no further interest rate cut in December. And unless inflation unexpectedly flares up again, the policy rate will fall even further in the course of 2025. That movement will soon echo through the currency markets. After better-than-expected economic figures from the United States, it looks like the American interest rate will fall a lot less quickly than it looked a few weeks ago. The growing interest rate differential makes it more attractive for parties to hold assets in the dollar. A weaker euro would not even be that bad for European businesses, because products and services would then become cheaper abroad. But bad news for those who travel far: if the interest rate drop continues, your euro will be worth less and less outside the eurozone.
Joost Derks
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