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As inflation in the Eurozone decelerates to a more manageable rate of 2.4% in March 2023, the European Central Bank (ECB) considers easing its stringent monetary policies, introduced to combat the peak levels seen at the end of 2022. This shift arrives amidst a declining trend in energy prices and the effective tightening of monetary policy.

Olli Rehn, Governor of the Bank of Finland, hinted at a potential easing of monetary restrictions by mid-2024, contingent on the continued deceleration of inflation rates.

However, he noted that geopolitical tensions, particularly the ongoing conflict in Ukraine and potential escalations in the Middle East, pose significant risks that could derail the economic stabilization efforts.

Despite these geopolitical challenges, the Eurozone has avoided the worst-case scenarios, especially in terms of energy supply, which had previously been a significant concern. The region's economic growth has stalled since late 2022, impacted by rising energy costs, higher interest rates, and increased market uncertainties which have subdued investments and consumer spending. However, the unemployment rate remains at its lowest since the introduction of the euro, indicating some resilience in the labor market.

Growth is anticipated to resume towards the end of the year, primarily driven by private consumption, although this rebound could face delays if geopolitical issues cause further spikes in energy prices or supply disruptions.

Over the past year, inflation expectations have returned to near the ECB’s target of 2%, thanks largely to the tightening of monetary policy which has also helped to stabilize wage pressures across the Eurozone. The ECB’s Governing Council has maintained the main refinancing rate at 4% during their April 2024 meeting, asserting that current rates significantly contribute to slowing inflation.

Rehn suggested that future decisions on interest rates would ensure they remain restrictive as long as necessary to curb demand. “In June, we will receive an updated assessment of inflation and core inflation trends, as well as the transmission of monetary policy. If this assessment reinforces our confidence that inflation is stabilizing around our target, we may begin to loosen monetary policy and lower rates, provided that there are no further setbacks in geopolitical situations or energy prices,” Rehn explained.

Amidst tightening monetary policy, banks have raised lending rates. However, interest rates on new mortgages have started to decline slightly, reflecting market expectations for a potential reduction in ECB rates.

The Eurozone’s economic recovery also hinges on enhancing productivity, which influences mid-term inflation and real interest rates. According to Rehn, investing in human capital is crucial for leveraging innovations and new technologies within businesses. "Improving productivity does not happen overnight. It requires sustained economic policy that supports investments and bolsters corporate growth opportunities,” Rehn emphasized.

HT

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