- The Association of German Banks reflects on the ECB’s decision
- The risk of inflation is still present
- Avoid overly optimistic economic predictions
The European Central Bank (ECB) has, as expected, responded to the fact that the risk of inflation has abated significantly since Autumn of last year by introducing a slight reduction in key interest rates. However, rates remain at a level that will continue to curb economic growth.
“That’s as it should be,” according to Heiner Herkenhoff, Chief Executive of the Association of German Banks. “The ECB, which is responsible for the euro, is still a long way from their goal when it comes to fighting inflation. Rising prices continue to be driven by above-average increases in wages in the service industry. And as things stand, even a drop in exchange rates for the euro could lead to an increase in inflation.”
“In light of this, it is important that the ECB not raise even the spectre of expectation that interest rates will be lowered in close succession. It is simply not inevitable that rates will be lowered further. It must be clear, for the next ECB meeting, that interest rates can only come down again if there is a discernible reduction in the risk of inflation. This is particularly true for the council meeting in September, despite the fact that a majority of market participants expect interest rates to fall at that meeting.”
Quite apart from that, Herkenhoff warns that Germany, in particular, must be cautious when it comes to overly optimistic economic expectations resulting from a reduction in interest rates. “Here in Germany, structural investment and location problems have been affecting economic growth for some time now. These impediments cannot be solved solely by the ECB and a reduction in interest rates. Instead, the country needs economic policies that provide clear regulations for making investments a priority.”
