According to the minutes of the European Central Bank’s latest policy meeting, policymakers believe interest rates can be significantly reduced if consumer price trends align with forecasts. The minutes, released Thursday, emphasized the need for caution given current uncertainties and factors that might hinder inflation from falling rapidly to target levels.
However, if core inflation projections are confirmed over the coming months and quarters, a gradual easing of policy would be appropriate. Markets widely anticipate a fifth interest rate cut in the current easing cycle at the ECB’s next meeting in two weeks. Despite a slight rise in inflation last month, policymakers remain confident in achieving the 2% target by 2025, while expressing concerns about the slowdown in the European economy.
U.S. mortgage rates rose above 7% for the first time since May, according to Freddie Mac on Thursday. The average 30-year fixed mortgage rate increased to 7.04%, up from 6.93% the previous week. Borrowing costs have risen in recent weeks, adding financial strain on homebuyers. Cold weather in parts of the U.S. and wildfires in California have further pressured housing demand.
Pending home sales for the four weeks ending January 12 fell by 8.4%. While strong job data released last Friday drove up 10-year U.S. Treasury yields, weaker-than-expected inflation data earlier this week caused yields to decline, fueling speculation that the Federal Reserve might cut interest rates sooner than anticipated.
On January 16, the European Central Bank released the minutes of its December meeting, revealing that a cautious, gradual pace of interest rate cuts aligns with the general consensus. Policymakers agreed on the need to clear additional “checkpoints” to ensure the disinflationary trajectory remains on track, leaving room for future adjustments.
Some members advocated for broader interest rate cuts, while others stressed the need for a gradual approach to assess whether rates had reached a neutral level. In general, a wide range of methods should be used to estimate the natural rate, evaluate the restrictive stance of policy, and consider the interplay between output, inflation, and interest rates.
The Governing Council was clear that caution should not be eased during the final stages of disinflation, especially as some assumptions underlying projections still require confirmation with concrete data. Achieving the inflation target ultimately hinges on monetary policy’s ability to permeate the economy, with a significant drop in services inflation expected in the first half of 2025.
The U.S. Commerce Department reported Thursday that retail sales rose 0.4% month-on-month in December, with November’s figure revised upward to 0.8%. Of the 13 categories in the report, 10 experienced sales growth, including furniture stores and sporting goods retailers. Auto sales grew 0.7% in December following strong growth in the previous two months, bolstered by Donald Trump’s threat to end tax exemptions for electric vehicles, lower interest rates, and increased manufacturer incentives.
Gas station revenues also climbed, reflecting higher fuel prices. The data indicate that consumers performed well during the holiday season, benefiting from wage growth outpacing inflation.
Despite last month’s decline in core inflation, Americans continue to face high living costs. Some retailers are reportedly considering price increases to offset potential tariff hikes after Trump’s inauguration next week. This could distort future retail data, as reported growth may reflect higher prices rather than increased sales activity, given that the data is not inflation-adjusted.
