Is inflation here to stay?

The expected rate cut announced by the ECB, which is likely to take place on 6 June, does not ensure that a regressive process of cuts will begin and could be of limited duration as inflation continues to exceed the targets set by the bank and is expected to persist at around 3%.


High inflation and the monetary policy of the European Central Bank (ECB) had a significant impact on mortgage borrowers in Europe. High interest rates have pushed up monthly repayments on variable-rate mortgages, putting many families in difficulties as they eagerly await the 6 June cut announced by the ECB.

Christine Lagarde, president of the European Central Bank (ECB), acknowledged on Tuesday that the rate cut that everyone expects at the meeting on 6 June is almost a done deal: ‘If the data we receive reinforces the level of confidence we have now, there is a high probability that the rate cut will take place at the meeting on 6 June’, Lagarde stated to Bloomberg.

Even so, this rate cut, the first since 2019, may be merely symbolic and with an expiry date that will do little to help families with difficulties in paying mortgages, who will have to prepare to face a high Euribor for longer than expected.

Despite sharply lowering its inflation forecasts, the ECB’s high interest rates are at levels not seen since 2001: the deposit rate is at 4%, the refinancing rate at 4.5% and the marginal lending facility at 4.75%. In 2019, these rates were around 0% and some experts expected a return to these levels, but now persistent inflation is expected to remain close to 3% for the eurozone. This figure is far from the 2% the European institution would like to maintain in the medium term.


More inflationary net factors

Although some economists believe that inflation will continue to fall to 2% by 2025, analysts at Commerzbank predict that the inflation rate will approach 3%, limiting the ECB’s rate cuts. They believe that by spring 2025 at the latest, the central bank is likely to realise that inflation has not fallen as much as anticipated and that it will have to end the cycle of interest rate cuts.

‘The effects on inflation could undoubtedly be even greater,’ the German bank says. Although much has been said about 3D inflation: decarbonisation, deglobalisation and demographics as some factors contributing to the inflationary scenario in recent years, Commerzbank’s analysis extends these to 5D inflation, adding defence investments and the public deficit.

Energy transition and deglobalisation are expected to maintain inflationary pressure, while ageing populations are expected to raise labour costs. At the same time, defence and public spending will divert resources, increasing production costs and stimulating demand, which raises prices.


Higher wage costs and low productivity

The substantial rise in wage costs is again dominating price developments and is likely to continue, a fact that is particularly evident in labour-intensive services. Also, according to the ECB, collectively agreed wages could increase by more than 4.5 per cent in the remainder of the year.

Moreover, wages are likely to rise much more next year than in the pre-pandemic years. With many businesses complaining about a shortage of skilled people, the workforce will still have a strong bargaining position.

Over the next ten years, the ageing of the population is expected to contribute increasingly to the reduction in the supply of workers. However, the demand for services such as health care for the elderly will also increase significantly.

On the other hand, Commerzbank points out that the 1.2% increase in labour productivity assumed by the ECB is too optimistic. It argues that while it is true that productivity tends to rise more strongly at the beginning of an upswing – as companies are better able to utilise their employees – complaints about labour shortages suggest that the employees they have are already heavily utilised at present. Therefore, the scope for productivity gains is likely to be limited and may not be able to significantly curb the rise in unit labour costs.

In conclusion, it seems clear that barring an unexpected event, inflation will not shortly return to pre-pandemic levels and interest rates will remain high for the time being. Therefore, households with variable mortgages have to prepare for an unfavourable economic environment and an Euribor that will not come down as much as expected.


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