Press release 16 April 2024 11:01 AM

Inflation is declining in line with the European Central Bank’s goal, paving the way for an easing of monetary policy

Inflation in the euro area has fallen substantially since its late-2022 peak. In March 2024, its annual rate was 2.4%. Inflation has fallen with the decrease in energy prices and the significant tightening of monetary policy.

“As summer approaches we can start reducing the level of restriction in monetary policy, provided that inflation continues to fall as projected. The biggest risks stem from geopolitics, both the deteriorating situation in Ukraine and the possible escalation of the Middle East conflict, with all their ramifications,” says Governor of the Bank of Finland Olli Rehn.

Growth in the euro area economy has been at a standstill since the end of 2022. This has been attributable to the fall in real incomes stemming from the rise in energy and other prices, and to the decrease in investment and consumption resulting from the higher interest rates and elevated uncertainty. On the other hand, the worst crisis scenarios – especially regarding energy availability – have been avoided. Euro area unemployment is also at its lowest since the introduction of the euro.

Growth is forecast to return to the euro area economy towards the end of this year, largely driven by private consumption, but this could also be delayed. The tensions surrounding the Middle East conflict and Russia’s war in Ukraine could raise energy prices again or bring supply disruptions. 

The tightening of monetary policy has contributed over the past year to inflation expectations returning to a level close to the inflation target of 2%. This has led to wage pressures beginning to moderate in the euro area.

At its April 2024 meeting, the Governing Council of the European Central Bank (ECB) took the decision to keep its principal key interest rate unchanged at 4%. The ECB's key interest rates are at a level that is helping considerably to push down inflation. The Governing Council’s future interest rate decisions will ensure that its policy rates stay sufficiently restrictive for as long as necessary. “In June, we will have an updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. If this were to further increase our confidence that inflation is converging to our target in a sustained manner, we could start to ease the stance of monetary policy and cut interest rates. This assumes there will be no further setbacks, for instance in the geopolitical situation and therefore in energy prices,” says Governor Rehn. The rates on new mortgages have already started to fall slightly, however, as the markets are expecting the ECB to cut policy rates.

The euro area economy needs to improve its productivity performance. Over the medium term, productivity has an impact on both inflation and the level of real interest rates. An important way of boosting productivity is to invest in human capital. A skilled labour force is essential if businesses are to adopt innovations and new technologies. “Improving productivity does not happen overnight. This requires long-term economic policy that supports investment and strengthens companies’ opportunities for growth,” says Governor Rehn.