In May, inflation unexpectedly increased in the eurozone, partly due to strong wage pressure. This news has led many financial market participants to believe that the European Central Bank (ECB) will lower the three key interest rates by 0.25 percentage points each, implementing the anticipated interest rate turnaround. However, despite this expectation, some argue that the interest rate turnaround may be premature.
The rise in inflation has been fueled by a sharp increase in collectively agreed wages in the euro area. This has the potential to exacerbate price increases, as wage pressures continue to be significant. Additionally, economic indicators suggest that the eurozone is experiencing moderate growth, providing room for companies to raise prices.
With the unemployment rate at a record low and signs of economic recovery, arguments for interest rate cuts are diminishing. Furthermore, reducing interest rates could widen the interest rate differential with the United States, potentially weakening the euro against the dollar and increasing inflation through higher import prices.
Despite pressure from financial markets for further interest rate cuts, it may be more prudent for the ECB to focus on lowering inflation to their target of 2 percent. The central bank should closely monitor economic data to determine the appropriate course of action. It is important for the ECB to resist temptation and avoid hinting at additional interest rate cuts.
Michael Rasch, a business correspondent for “Neue Zürcher Zeitung” in Frankfurt am Main, reported this information in his newsletter “The Other View.”
