Europe Faces Twin Blow If ECB and Fed Don’t Cut, Scicluna Warns

• Hashim Sheikh
• . April 19, 2024
• . Update: April 19, 2024 6:49 pm
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The euro zone’s economy stands at a critical juncture, facing the potential for a significant setback if both the European Central Bank (ECB) and the Federal Reserve do not lower interest rates. ECB Governing Council member Edward Scicluna has warned that the current economic outlook depends heavily on a shift towards less restrictive monetary policy.

Monetary Policy’s Impact on Recovery – Europe Faces Twin Blow

Scicluna has emphasized the pivotal role of monetary policy in driving economic recovery. He has highlighted that the assumption of a turnaround in the economy and a recovery in the second half is contingent on a less restrictive monetary policy. Failure to cut rates could result in a double blow to the euro zone’s economy, particularly if a more restrictive monetary policy stance in the US affects global financing conditions.

ECB’s Stance and Policy Implications

The ECB has been under increasing pressure to address the euro zone’s sluggish economic growth. With consumer-price gains moderating, the prospect of lower borrowing costs offers some hope for the economy. Scicluna has stressed the importance of avoiding premature declarations of victory over inflation, emphasizing the need to maintain inflation around the 2% target.

Risks of Inaction

Scicluna has cautioned against complacency in the face of improving economic indicators. He has warned that delaying action could lead to a scenario where inflation remains too low, reminiscent of the years following Europe’s debt crisis. Such a situation would likely require more forceful action from the ECB to stimulate economic growth.

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Potential ECB Response

In light of potential undershoots in the inflation target, Scicluna has suggested that the ECB should be prepared to take more forceful action. If inflation rises further on the downside and projections show inflation below target in 2025, a 50 basis points rate cut might be necessary.

Scicluna’s warning underscores the delicate balance facing the ECB and the Federal Reserve. Prudent monetary policy is crucial to supporting economic recovery in the eurozone. The ECB must carefully assess economic indicators and be ready to take decisive action to prevent a prolonged period of low inflation and economic stagnation.