The European Central Bank (ECB) is grappling with unexpectedly low inflation, which fell to 1.8% in September 2023, below the bank's 2% target. This decline is prompting a reevaluation of monetary policy, with investors anticipating a potential interest rate cut at the upcoming October meeting.
Financial markets are predicting a quarter-point reduction, which would lower rates to 3.25%. Economists warn that without decisive action, inflation may continue to undershoot the ECB's target, with projections suggesting rates could drop to as low as 1.7% by mid-2024.
Jens Eisenschmidt, chief Europe economist at Morgan Stanley, highlights the historical challenges the ECB has faced with low inflation, noting that from 2011 to mid-2021, inflation fell short of the target in 93 out of 120 months. The ECB's current forecast anticipates reaching its 2% goal by the fourth quarter of 2025, though skepticism surrounds these projections.
Concerns were already evident in the minutes from the September meeting, indicating that ECB staff were wary of falling short of the inflation target. Yannis Stournaras, governor of the Bank of Greece, predicts that the target may not be met until early 2025, influenced by temporary factors such as declining oil prices.
Critics argue that the ECB has been slow to respond, with some claiming that the bank's understanding of inflation dynamics is flawed. The ongoing low productivity, weak investment, and aging population are exacerbating the economic landscape, leading to calls for a more cautious approach to monetary easing.