Interest rate cut appropriate – inflation to ease slightly in the first half of the year

• Inflation to move closer to ECB target of two percent in first half of the year 
• US economic policy could increase inflation in the euro area
• ECB should continue to keep its options open

As expected, the European Central Bank (ECB) today cut its key interest rates by 25 basis points. “This is appropriate, despite inflation in the euro area rising again in the last three months to nearly 2.5 percent,” said Heiner Herkenhoff, CEO of the Association of German Banks. The key interest rate is now somewhat more securely in the neutral range of between two and three percent.

At this level, key interest rates are no longer holding back the economy in the euro area. “We also assume the rate of inflation will recede somewhat in first half of the year, getting us even closer to the ECB’s target of two percent.”

He did not, however, share the speculations of many market participants that the rate of inflation could remain below the ECB’s target for an extended period of time over the course of the year. Herkenhoff pointed out the significantly stronger rise in the prices of services and the comparatively high wage increases. “On top of which, the new US government’s trade and economic policy could also put more pressure on inflation in the euro area – either through trade policy countermeasures on the European side or if the euro continues to devalue.”

The Association of German Banks therefore expects a long-term inflation rate in the euro area of just above the two-percent mark. Against this background, the ECB should continue to act flexibly and keep its interest-rate options open. “The ECB should remain on its current course. A key interest rate of two percent or below will only be possible when inflation in the euro area falls below the two-percent mark for an extended period,” said CEO Herkenhoff.