2024 got off to a relatively smooth start in terms of both global economies and major stock markets, especially in contrast to 2022, and 23 to a lesser degree.
When dealing with some of the world’s major economies, all eyes tend to venture across the Atlantic, and focus sharply on the U.S. Now, the U.S economy is quite literally the largest in the world, so that is to be expected. You should not however, overlook Europe. Specifically, the European Union (EU).
One of the primary reasons for European economies enjoying such growth over the years is the ECB (European Central Bank). The ECB is the EU’s central bank. Any countries which use the Euro as their primary currency are governed by the ECB. One of their key objectives is to maintain price stability, which, in their own words, they do through targeting inflation to ensure it remains ‘low, stable, and predictable’.
As we enter yet another financial year, inflation is still the buzzword of the day, and was at the forefront of the ECB’s monetary policy for 2024. But what have the ECB decided in their monetary policy for January and what directions could European economies be heading in the future?
Here’s the ECB’s monetary policy at a glance, and what it may mean for the future.
What is the ECB’s Monetary Policy?
In basic terms, a monetary policy is a specialist policy adopted via the monetary authority of a country, designed to affect monetary and financial conditions in order to achieve wider objectives such as price stability, high employment rates, and low and stable rates of inflation.
When the ECB implemented their monetary policy for 2024, inflation was at the forefront of virtually all decisions they made. It was clear from the offset, that the ECB’s primary objective was to bring inflation down, and keep it stable. Inflation is the rate in which prices for overall goods and services changes over time.
According to the ECB, in order to achieve job creation and economic growth, they must achieve and maintain price stability. In order for them to do that, they keep inflation ‘low, stable, and predictable’.
Their monetary policy stated that their target rate for inflation is 2% over the medium term. At the moment, experts believe that inflation in the Euro Area is 2.8%, down slightly from 2.9% for the final month of 2023. The ECB are, however, cautious when it comes to low inflation rates, as they view this as just as problematic as high inflation.
An Overview of the ECB’s Monetary Policy Statement
As mentioned, the European Central Bank’s primary objectives when setting their monetary policy earlier this month was to bring inflation down to their target of 2% and maintain it there. Remember, they’re looking for stability.
In order to achieve their objective, their monetary policy set out a wide range of different strategies designed to help them achieve precisely that. Here’s an overview of what they revealed with their January 2024 monetary policy statement.
Inflation is Still Too High
According to the ECB’s Governing Council, when it comes to maintaining inflation, the sweet spot to aim for is 2%. They believe that price stability is best maintained when a target of 2% inflation is set for the medium term.
The Governing Council aims to achieve price stability over the medium term as this will allow for slight deviations from the target for the short term, while still providing all of the necessary flexibility required to get back on track and cater for other considerations if necessary.
Ultimately, at 2.8%, inflation in Euro Zone countries is still considered too high. Until inflation comes down, this could, and likely will, have a knock-on effect on other aspects of the economy.
They Kept Interest Rates Unchanged
Remember when we mentioned above, how high inflation could have knock-on effects and influence other aspects of the economy? Well, one of the main reasons for this is that higher rates of inflation lead to higher interest rates.
When global inflation rates peaked, with many hitting double-digits in 2022 in October 2022, many of the world’s leading monetary authorities were forced to step in and hike interest rates. Interest rate hikes are designed to tackle inflation as it means people and businesses pay more interest on mortgages and loans, and have less disposable income. They also provide better rates for savers, so people are encouraged to save money, rather than spend it.
The problem with interest rate hikes is that it can affect businesses and make it more expensive to pay back loans and forms of credit. To offset these expenses, businesses are often forced to pass these expenses on to customers by increasing their prices.
By now, people are really beginning to feel the squeeze and there is hope that banks such as the FED in America, as well as the Bank of England, and the ECB, would start to implement interest rate cuts. The ECB, however, opted to keep interest rates unchanged as they were not happy with the rate in which inflation was falling.
EU Economies are Weak
As a result of inflation, high interest rates, as well as global and regional conflicts and their effects on trade, economies in the EU are weaker than governing bodies would have liked.
Industrial and manufacturing firms have reduced their production and retailers in many regions have noted a sharp decline in sales.
As a result of this, the effects of the above have made economic futures more uncertain.
Employment Figures are Promising
Despite the economic outlook in the EU looking decidedly gloomy, there are a few glimmers of sunshine on the horizon.
According to the ECB’s monetary policy, unemployment rates are currently at their lowest levels since the start of the Euro.
Even though fewer firms are actively advertising job vacancies, more people are seeking employment and securing jobs. As a result, employment figures in the EU are looking very promising. The ECB is therefore hopeful that this could also help to strengthen the economy, particularly when inflation rates hit their 2% target.