ECB faces further scrutiny this week on timing of first rate cut

Consumers in Ireland and the US appear to anticipate better news in 2024 as energy, grocery, and petrol price inflation eases, the latest Credit Union Consumer Sentiment Survey suggests

Economist Austin Hughes said Irish consumers were in their most buoyant mood for two years this month. 

Pressure on the European Central Bank (ECB) to start cutting interest rates before the summer could likely intensify as its US counterpart, the Federal Reserve, may signal an early date for its first rate reduction, when it meets later this week.

It comes as consumers in Ireland and the US appear to be anticipating much better inflation news in 2024, with their confidence increasing sharply in January as energy, grocery, and petrol price inflation falls, according to the latest Credit Union Consumer Sentiment Survey.

The ECB, at its meeting last week, continued to press against market expectations that tumbling inflation and contracting manufacturing in major eurozone economies like Germany    could force the bank to cut as early as March.

ECB president Christine Lagarde had told reporters she stuck by her previous remarks of a possible rate cut in the summer, but the ECB may come under further scrutiny should the Federal Reserve on Wednesday night be forthcoming about its plans for an early rate cut.

Governor of the French central bank, François Villeroy de Galhau yesterday threw down the gauntlet to his colleagues, raising the prospect of loosening monetary policy.

Speaking in an interview with La Tribune Dimanche, he said there will be interest rate cuts this year: 

Regarding the exact date, not one is excluded, and everything will be open at our next meetings.

It is also a challenge to policymakers including Klaas Knot of the Netherlands, who insist that the ECB will need to see a turnaround in wages before it can start lowering borrowing costs. 

By contrast, Mr Villeroy said waiting too long could be a problem: 

"We will have to avoid two risks that have become balanced — cutting too soon and missing the target, but also acting too late and excessively slowing activity," he said

In Ireland, consumers were this month in their most buoyant mood for two years, according to the Credit Union survey.

Austin Hughes, an author of the report, said: “The sharp improvement in Irish consumer sentiment in January was mirrored in strong gains in the comparable indicator for the US which posted a slightly smaller monthly increase but one which was sufficient to boost US consumer sentiment to its best level in two and a half years.”

"In the case of US consumers, a roughly 20% drop in gasoline prices in recent months is seen as a key pointer towards a reversal of earlier inflation pressures while the resilience of the economy is reflected in persistent jobs growth and low unemployment," he said. 

• Irish Examiner and Bloomberg