Juhana Brotherus warns that the ECB’s monetary policy will be taken back to zero interest rates

European the central bank (EKP) set its key interest rate at 3.00 percent on Thursday. As expected, the ECB cut its key interest rate by 0.25 percentage points.

Chief Economist of Suomen Yrittäjai Juhana Brotherus Finland in its recent announcement on the pace and size of the central bank’s interest rate cuts. In his opinion, the ECB is recycling the same mistake in interest rate cuts that it also fell into in its interest rate hikes in 2022.

“The ECB was late in raising interest rates in 2022, even though market forecasts said that inflation would clearly exceed the target in the future. Now the mistake is being made in the other direction,” Brotherus writes.

“Since the summer, market forecasts have indicated a clear risk of too low an inflation trend in the next few years.”

According to Brotherus, the ECB should react without delay to “downside risks of inflation”. He considers an excessively tight monetary policy to increase the risk of a return to zero interest rates.

“If economic development falters under unnecessarily high interest rates, the central bank will have to stimulate even more by lowering interest rates in order to bring the inflation trend back to a stable track,” Brotherus writes.

European the central bank’s primary goal is to take care of price stability. Its secondary task is to ensure that economic growth, employment and labor productivity are on a sustainable basis.

According to the price stability objective, inflation must be two percent in the medium term. Based on preliminary data, the inflation rate in the euro area was 2.3 percent in November.

As worn In 2018, the ECB has cut its key interest rate four times by 0.25 percentage points, i.e. 1.00 percentage points in total. Financial markets believe that interest rate cuts will continue next year at least until the summer.

Interest rate cuts are transmitted to the economy in stages and typically reach their full effect within 1–2 years.