- Home »
- Insights »
- CIO View »
- Chart of the Week »
- The ECB seems increasingly confident
Back in the 1950s, the distinguished Estonian-American economist Ragnar Nurkse laid much of the groundwork on how to think rigorously about such thorny issues as how to get growth going in poor countries in the first place.[1] So, it is perhaps fitting enough that Isabel Schnabel took the occasion of speaking at the Ragnar Nurkse Lecture Series to briefly ponder the effects of monetary policy on household savings behavior.[2]
As a member of the Executive Board of the European Central Bank (ECB), Ms. Schnabel is no doubt well aware that this throws up some quite tricky problems in theory. In practice, though, it does seem that the current level of interest rates has been incentivizing Eurozone households to save more and spend less. Citing survey evidence going back to the 1980s, she pointed out that savings intentions for the coming year have never been higher than these days. This is highlighted in our Chart of the Week, which looks at the net balance of survey participants planning to increase, rather than reduce their savings.
Moreover, households have actively been shifting their savings into time deposits potentially offering higher returns for longer, perhaps partly driven by precautionary motives, as well expectations of further ECB interest rates cuts. By dampening aggregate demand, this would make it harder for businesses to increase prices for goods and services, in turn allowing the ECB to cut rates further.
Among Eurozone households, savings intentions are the highest since surveys began.
Sources: European Commission Survey, tabulated by DWS Investment GmbH as of July/2024
*survey participants planning to increase the savings
“We continue to expect the ECB to cut the deposit rate by 25 basis points to 3.50% at the next ECB meeting on September 12,” explains Ulrike Kastens, European economist at DWS. Admittedly, recent declines in inflation mostly reflected falling energy prices, while the increase in service prices accelerated from 4.0% in July to 4.2% in August. Reports from the individual countries show that prices for package holidays and overnight stays in particular have risen.
After the end of the holiday season and the Olympic games in France, these prices are likely to ease somewhat in the coming months, but with some underlying pressures remaining due to wage increases. By contrast, the downward trend in consumer goods continued and weaker domestic demand will exert further downward pressure on prices over the next few months. No doubt, the ECB will continue to monitor a variety of indicators. Still, there are good reasons for its growing confidence that the inflation target of 2% can be reached again within the not-too-distant future.
