Inflation in the Netherlands to drop below 2% in two years, DNB predicts

Inflation in the Netherlands is expected to fall below the European target of 2 percent within two years, according to a new forecast by De Nederlandsche Bank (DNB). This indicates a faster decrease in price increases than anticipated. The Dutch central bank also indicated on Monday that the Dutch economy may face stagnation and downgraded its growth forecasts.

Regarding inflation, DNB Chief Economist Olaf Sleijpen noted on Monday that the historically large interest rate hikes by the European Central Bank (ECB), aimed at reducing inflation, "appear to be bearing fruit."

The Dutch central bank forecasted inflation at 2.9 percent for next year, with the annual increase in the price level expected to drop "just below 2 percent" by the end of 2025. The general decline in price increases is mainly due to the decreasing cost of energy.

By raising borrowing costs, the ECB aims to make spending less attractive, thereby slowing the rise in prices of products and services. With inflation already having fallen rapidly, from nearly 12 percent last year to around 4 percent in 2023, the ECB has kept interest rates stable at a high level in recent meetings.

However, Sleijpen suggested that this does not mean interest rates can be significantly reduced by next spring, contrary to what market experts expect. "They say the market is always right, but I have my doubts about that now," he said. Policymakers in both the United States and Europe have also indicated that a cut in interest rates, which could, for instance, lower mortgage rates, might be further off than anticipated.

DNB also outlined a more negative scenario where global tensions could lead to rising energy and oil prices. In this case, inflation in 2025 is likely to remain slightly above the desired 2 percent.

Dutch economy faces stagnation, DNB revises growth forecasts downward

The Dutch economy is in worse shape than was thought earlier this year. De Nederlandsche Bank (DNB) said on Monday it expects economic stagnation for both this year and next, while in June, it anticipated growth rates of 0.8 percent and 1.3 percent. Significant setbacks in other countries are impacting the Netherlands as a trading nation, as shown in the central bank's biannual forecast.

DNB had already predicted a slowdown in the global economy due to increased interest rates, but particularly the economic developments in the United States and China are now harming global trade. Difficulties faced by the Netherlands' key trading partner, Germany, are also proving to be a hindrance. Consequently, the growth of the gross domestic product (GDP) is expected to be only 0.1 percent this year and 0.3 percent in 2024. Last year, the economy grew by more than 4 percent.

However, the high inflation and escalated geopolitical tensions could have damaged the Dutch economy even more. According to DNB Chief Economist Olaf Sleijpen, this was averted due to government support packages, such as the energy price cap, which helped keep consumer spending somewhat steady.

DNB noted that the government may soon be unable to make such interventions. The budget deficit is expected to rise to 2.9 percent in 2025, nearly reaching the EU limit of 3 percent. This means the government would need to make cuts before it can introduce large support packages to comply with the rule. "Such interventions have actually helped us in both the energy and coronavirus crises," Sleijpen explained.

Compared to some other European countries, the Netherlands' economic growth is lower. "This is partly because we grew faster right after the coronavirus pandemic," the economist noted. "However, unlike other economies, the Netherlands is facing capacity limits, including in housing construction and the tight labor market. Interventions are needed here."

According to Sleijpen, the country would benefit from a quick cabinet formation. "Clarity is very important for the business world so that they start investing more." Sleijpen is critical of the idea of leaving the EU, advocated by the election-winning PVV in their campaign. "That is a very, very bad idea,” he said.

For 2025, DNB predicted stronger growth of 1 percent, helped by further increased wages to restore purchasing power. In an alternative scenario where global trade deteriorates further, the Netherlands could face economic contraction next year and weaker growth of 0.6 percent in 2025.