ECB Cuts Interest Rates Amid Below-Target Inflation
“Today’s rate cut was all but guaranteed given favorable inflation data released earlier this week, which points to a disinflationary process that remains underway in the eurozone,” said Grant Slade, international economist at Morningstar.
“The statement from the ECB reaffirmed its ‘data-dependent’ approach to determining its policy stance. This reflects uncertainty on the part of the ECB as to whether further vigilance is required to truly win the war on inflation, while also leaving flexibility for further monetary easing should economic conditions amid a trade war warrant.”
The decision comes a day after the ECB and the European Commission gave Bulgaria the green light to join the euro in 2026, making it the single currency bloc’s 21st member after Croatia adopted the single currency in 2023.

Why has the BOE have interest rates at 4.25% and now the ECB at only 2%?
That’s an insightful question, and it highlights a counterintuitive aspect of current monetary policy. While raising interest rates is the **primary tool to combat inflation**, there are specific channels through which high rates can *temporarily* contribute to measured inflation. Here’s a breakdown:

1. The Standard Mechanism: How Higher Rates *Fight* Inflation**
– Reduces Demand:** Higher borrowing costs discourage consumer spending (e.g., loans, credit cards) and business investment (e.g., expansion, hiring). This cools down the economy.
– Tames Wage Pressures:** Slower economic activity reduces competition for workers, easing wage growth.
– Strengthens Currency:** Higher rates attract foreign capital, strengthening the pound (£). This makes imports cheaper (lowering import-price inflation).
– Anchors Expectations:** Signals the BOE’s commitment to price stability, preventing a wage-price spiral.

2. The Paradox: How High Rates *Can* Temporarily *Add* to Inflation**
– Mortgage Costs:** This is the **biggest factor** in the UK (where variable/fixed-term remortgages are common).
– When the BOE hikes rates, millions of homeowners face higher mortgage payments when they remortgage.
– Owner Occupiers’ Housing Costs (OOH)** and **Rental Prices** (as landlords pass on costs) are **direct inputs into the CPI calculation**. This *mechanically* pushes up the inflation index.
-Impact:** The ONS estimates this added ~1 percentage point to CPI in 2023. Without it, inflation would have been closer to 3% late last year vs. the reported 4%.
– Business Costs:** Firms facing higher loan costs *may* pass some onto consumers, though competition limits this.

3. **The BOE’s View & Nuance**
– Temporary Effect:** The BOE acknowledges the mortgage cost passthrough but views it as a **one-off administrative effect** within the CPI basket. It doesn’t represent broader inflationary pressure.
– Core Inflation Focus:** The BOE looks closely at **Core CPI** (excluding energy, food, alcohol, tobacco) and **services inflation**, which better reflect domestic demand and wage pressures. High rates directly target these.
– Risk of Not Acting:** If the BOE *didn’t* raise rates, demand would stay too hot, wage growth excessive, and inflation would become **entrenched** – a far worse outcome.
– Trade-off:** The BOE accepts *short-term* inflationary pressure from mortgages to prevent *persistent* high inflation requiring even harsher medicine later.

4. **Is the BOE “Fueling” Inflation?**
– No, in the fundamental sense.** High rates are actively *destroying* the root causes of inflation (excess demand, loose credit).
– Or Yes, in a narrow, statistical sense.** Mortgage costs in CPI create an *arithmetic* boost to the headline number. This is a **measurement quirk**, not new inflation being created.
– The Alternative is Worse (or not Ed) : Cutting rates prematurely to ease mortgage pain would likely (??) reignite demand, weaken the pound (boosting import costs, but make exports cheaper so more attractive to overseas buyers, thus helping the balance of payments, therefore improving the economy), and signal a lack of resolve? – causing inflation to surge again?

Conclusion (Ed’s comments too)
The BOE is **not fueling underlying inflation by keeping rates high. It is addressing its core cause. The mortgage cost though is a **temporary, arithmetic consequence** of the policy within the CPI calculation. While painful for homeowners, the BOE judges, (Maybe wrongly -editor Lee Green) that failing to hike rates would lead to **higher, more persistent inflation** requiring even more severe action later. The focus remains on bringing down *core* and *services* inflation to the 2% target sustainably.


ANSWER CURTOSY OF DEEPSEEK