Over the next couple of days, there will be a series of data releases that will be the first major test of the ECB’s resolve on interest rates. In its last meeting, the ECB said rates were now at their maximum, unless there was a major change to the data. The main reason being that the Euro Area is facing economic stagnation if not outright recession, though the ECB didn’t put it as starkly as that.
After the meeting ECB officials were still talking tough about inflation. They rely on keeping rates higher for longer, rather than raising them, to reduce CPI rises. This rhetoric can have the effect of strengthening the Euro against the dollar – if the data conforms to expectations. As long as the economic outlook is at least marginally positive, the ECB can keep rates high. If GDP starts to fall, the central bank could be forced to cut rates in order to boost the economy.
It’ll keep coming down
The ECB’s plan of holding rates at the current level is based on a projection that core inflation will continue to fall through the rest of this year and all through next year. Some hiccups are to be expected, but anything that indicates a…