Opinion Joost Derks
The interest rate will soon decrease further
The European Central Bank will lower the policy interest rate again next week. Now that inflation is under control, the focus shifts to boosting the very weak economic growth pace in Europe.
According to preliminary data from data collector Eurostat, inflation in the eurozone in September reached 1.8%. After more than three years, the European Central Bank (ECB) has managed to bring inflation back below the target of 2%. This seems like a remarkable achievement considering that inflation surged from less than 1% to over 10% between early 2021 and the fall of 2022. However, it is too much to attribute the tame inflation at the moment solely to smart central bank policy. It also helped significantly that after the pandemic, global goods flows resumed, eliminating various artificial shortages.
Tough task
Actually, the hard work for the ECB is only just beginning. Because it will be quite a challenge to devise a policy that sufficiently stokes the fire under the European economy. In the second quarter, the growth pace was only 0.2%. It is not news that economic growth within the eurozone must be sought with a magnifying glass. This growth is entirely determined by an increase in the workforce and an improvement in productivity. Due to aging, the workforce is slowly decreasing. Meanwhile, productivity in the eurozone is increasing much less rapidly than in, for example, the United States and China, where companies embrace new innovations much more quickly.
Release the brake
Last month, former ECB President Mario Draghi pinpointed the issue in a comprehensive report on Europe's competitiveness. In addition to closing the innovation gap, he also points to opportunities in transitioning 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 minimally impeded. By lowering the policy interest rate next week, central bankers are, in a sense, releasing the brake slightly.
Further rate cuts
It would be surprising if there is no further rate cut in December. And unless inflation unexpectedly flares up again, the policy interest rate will continue to decline further in the course of 2025. This movement will soon resonate in currency markets. Following positive economic data from the United States, it appears that the American interest rate will decline much more slowly than it seemed just a few weeks ago. The growing interest rate differential makes it more attractive for parties to hold assets in dollars. A weaker euro would not be so bad for European businesses, as products and services abroad would become cheaper. But bad news for those taking a trip: if the rate cut continues, your euro outside the eurozone will be worth less and less.
Joost Derks
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