Frankfurt, Germany

The European Central Bank (ECB) is signaling a shift in its monetary policy stance as new data reveals a stagnant lending market and subdued consumer inflation expectations. The figures released today bolster the case for an interest rate cut in June, potentially marking a turning point in the ECB’s fight against inflation.

The data paints a picture of an economy struggling under the weight of high borrowing costs. Bank credit to businesses and households continues to slow, with growth in lending to households hitting a new decade low of 0.2% in March. This stagnation reflects both borrower hesitation due to high rates and a reluctance of lenders to extend credit in a cautious economic climate.

However, there’s a silver lining. The ECB’s strategy appears to be having the desired effect on inflation expectations. Consumer projections for inflation in the next year have fallen to their lowest level since December 2021, dipping to 3.0%. This suggests that the ECB’s aggressive interest rate hikes are starting to tame inflationary pressures.

“Today’s data strengthens the argument for a cautious easing of monetary policy,” stated Bert Colijn, senior eurozone economist at ING. Heeding this call, ECB policymaker Fabio Panetta recently cautioned against excessively tight monetary policy, highlighting the risk of stifling economic growth.

While inflation has receded from its peak, the outlook remains uncertain. Soaring energy costs, persistent inflation in the service sector, and geopolitical tensions all pose threats to price stability and economic recovery.

The data also offered a glimmer of hope. The money supply in the eurozone, often seen as a leading indicator of economic activity, has rebounded and is growing at its fastest pace since last May. This, along with other recent data points, suggests a potential stabilization or even a tentative recovery on the horizon.

The ECB faces a delicate balancing act. While the fight against inflation is far from over, the recent data suggests it may be time to ease the brakes on borrowing costs. The June meeting of the ECB Governing Council will be closely watched as they decide on the future course of monetary policy in the eurozone.