Inflation falling in Europe, will the ECB cut interest rates?

Inflation slowed down in October. Both in Italy (+1.8%) and in Euroland (+2.9%). This is why many hope that, if the slowdown consolidates in the coming months, the BCA can consider its goal achieved. Visco, on his last day at Bank of Italy, is holding back his enthusiasm: rates will remain high for a long time

The high prices bite a little less. Both in Italy and in the rest of Euroland. This is why many hope that the ECB can consider its aim achieved, not only by putting an end to the increase in rates but even starting to reduce them. Also because the continuous increases of the last 14 months (the series of increases began in July 2022) have ballasted the Eurozone economy, pushing it almost to the brink of recession (Italian GDP in the third quarter recorded zero growth compared to the second). A possible scenario? We see.

First of all, the long-awaited numbers of the slowdown: prices in Italy, in the month of October, increased by 1.8% on an annual basis, according to preliminary estimates from Istat, which compares with +5.3 September %: This is the smallest increase since July 2021, in over two years. The slowdown was widely expected by economists, because it was linked to the comparison with October last year, which was a record month for the increase in prices, especially energy prices. Compared to last month, in fact, the change in prices was minimal: -0.1%.

Looking then at the “shopping cart” (the index of food, home and personal care goods) the inflation levels still remain high: in fact it recorded an increase of 6.3% compared to October one year, in September it was at +8.1%. In short, prices here are still rising sharply. The cyclical change (i.e. compared to September) is +0.1%.

“An unprecedented slowdown, also the result of the effective measures implemented in the fuel sector and the unanimous initiative of the tricolor trolley” was the immediate comment of the Minister of Business and Made in Italy, Adolfo Urso; while Federconsumatori and Codacons speak of an “optical illusion”, given that “the data must be taken with caution: the comparison takes place, in fact, compared to a period in which the inflation rate recorded a very strong increase”, i.e. October 2022.

So is there a chance that the ECB will start cutting rates? It’s too early to tell. The objective of remaining below 2% has not yet been achieved: at Euroland level in October we fell to +2.9%, a good step forward compared to 4.3% in September, according to the flash estimate released by Eurostat, but still above target. And even when this objective is achieved, it is very unlikely that a cut will come immediately. Analysts are convinced of this, also according to the latest statements from central bankers.

“Interest rates will remain high for a long time” said the Governor of the Bank of Italy Ignazio Visco clearly, in his last speech before leaving office, after 12 years, to his successor Fabio Panetta (who takes office on Wednesday 1st November) .

Always considered a ‘dove’ within the ECB Council, Visco defended the approach defined as “wise” adopted so far by the Frankfurt institute, an approach that allows “the right balance between the risk of doing too much and that of not doing enough.” However, Visco reiterated “caution will certainly be needed in the coming months, after such a marked and rapid increase in official rates. Because it is necessary to guarantee that the reduction in inflation occurs within the established times, but at the same time to avoid excessive monetary and credit have inappropriate recessive effects, thus also contributing to fueling uncertainty about the economy and price stability itself”.

Moreover, only a few days ago the number one of the Eurotower, Christine Lagarde, had used equally clear words: to those who asked her if at the last meeting they had started to think about a rate cut, she replied smiling: “I don’t have any we didn’t even talk.”