Europe’s central bankers are trying to get out of the shadow of the United States.
For much of the past two years, policymakers on both sides of the Atlantic raised interest rates aggressively to fight a surge in prices, and since last summer, they have left rates high as they assess whether inflation is under control.
Now, European Central Bank policymakers are emphasizing how much the inflation problem has eased in the eurozone. Last week, they flocked to meetings of the International Monetary Fund and World Bank in Washington with a common message: Europe’s economy is not like that of the United States.
All week, Europe’s policymakers reiterated their growing confidence that high inflation was dissipating in the eurozone and that their 2 percent inflation target was in sight. The E.C.B., which sets interest rates for all 20 countries that use the euro, has signaled it could cut rates at its next policy meeting in early June.
“We’re clearly in a disinflation process,” said Gabriel Makhlouf, governor of Ireland’s central bank and one of the 26 members of the E.C.B.’s governing council. But, he added, “you can argue that what’s happening in the U.S. is potentially a sort of a re-acceleration.”
The Federal Reserve is facing surprisingly strong inflation readings, and investors have pushed back to the end of the year their bets on a rate cut. But that gloom has spilled over into European financial markets, pushing bond yields higher and complicating the picture for the eurozone policymakers.
“We can’t ignore what’s happening in the U.S.,” Mr. Makhlouf said. Europe is an open economy, and events in other parts of the world have an impact, he added, “but it’s not the totality of what affects the European economy.”
Mr. Makhlouf says the E.C.B. is likely to cut rates in June. “If that turns out to be before the Fed moves, maybe that’s an indicator for markets that we will be focused on our own primary objective,” he said.
A divergence in policy between the two central banks would reflect a widening chasm between their economies. The eurozone has stagnated for the past five quarters as high prices and interest rates have taken their toll, while the United States has expanded unexpectedly strongly.
In Europe, prices soared after Russia invaded Ukraine and the European Union moved quickly away from importing Russian natural gas, a critical source of energy. But this price shock has passed through the economy, and inflation in the eurozone slowed last month to 2.4 percent, in a range where it is expected to fluctuate before returning to the target in the middle of next year.
In the United States, inflation was driven by factors at home. Demand for services and goods — like hotel stays and concert tickets — has kept prices high after government stimulus supported spending. The chair of the Fed, Jerome H. Powell, said it would take longer to gain confidence that high inflation had been stamped out.
Large gaps are opening up between the United States and Europe on economic growth, consumer spending and productivity growth. Despite all these differences, European markets are still heavily influenced by expectations about what the Fed might do. That has two opposing effects.
On the one hand, bets that the Fed will hold off cutting rates has pushed up yields on governments bonds in Europe, making it more costly to borrow to buy a home or expand a business and putting more pressure on the eurozone economy, which tends to lower inflation. But these bets have also weakened the euro against the U.S. dollar, which tends to be inflationary because it makes imports more expensive. In the past six weeks, the euro has weakened more than 2 percent against the dollar.
“What will be the net impact of the two? Nobody knows exactly,” said Boris Vujcic, the governor of Croatia’s central bank, who recently joined the E.C.B. governing council. “That’s another reason why I think we have to emphasize that we have to be cautious and really observe data.”
Several of the central bank’s policymakers said the council remained cautious and did not want to hastily ease monetary policy in case inflationary pressures had not fully subsided. Inflation in the services sector has held stubbornly at 4 percent for the past few months, and geopolitical risks, such as the conflict in the Middle East, could have sudden and large economic ramifications.
Among Europe’s policymakers, there is still a debate about how many rate cuts there might be and how big. The I.M.F. recommended that the E.C.B. cut rates quarterly in quarter-point increments until September 2025, which would take the deposit rate to 2.5 percent, from 4 percent.
Investors are also betting the E.C.B. will cut rates three times this year — at meetings in June, September and December, when the central bank publishes new quarterly projections about the economy and inflation.
“I have no major objections with what the markets have been pricing recently,” said Martins Kazaks, Latvia’s central bank governor. Though the quarterly forecasts are important, decisions could be made at meetings without them, he said.
“What happens in the U.S. in terms of inflation stickiness, of course, raises some more questions, but, in my view, disinflation continues,” he added. Unless “something dramatic happens” the E.C.B. is on track to cut rates in June, he added.
Mario Centeno, Portugal’s central bank governor, said the size of a rate move was “an open issue.”
“I will prefer small movements than big moves and then stopping” because it sends a clearer message to investors and is more conservative in the face of economic uncertainty, he said. “But there’s nothing that prevents us to move quicker at the beginning and then slowing it down.”
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