ECB policymakers warn about inflation challenge

June 8, 2024

European Central Bank policymakers warned today that the final stage of pushing inflation down to 2% could be especially hard but said they were confident that policy was working as intended, while some even saw room to ease policy further in 2024.

The ECB cut interest rates from record highs on Thursday in a long-telegraphed move, but held back from any pledge to ease policy further after inflation and wage growth data in recent weeks came in above its expectations, indicating it will need even longer to meet its target.

The biggest warning came perhaps from Germany, the euro zone’s largest economy, which poured cold water on suggestions that a big wage jump this year was a one-off.

“Negotiated wages are expected to rise particularly sharply this year and continue to see strong growth thereafter,” the Bundesbank said. “Inflation is proving to be stubborn, especially in the case of services.”

Wage rises increase disposable incomes and thus put upward pressure on prices, particularly in wage sensitive sectors like services.

Bundesbank chief Joachim Nagel said Thursday’s rate cut was not premature given the progress on inflation but he also said the ECB would not be on auto pilot for further rate cuts.

Austria’s Robert Holzmann, the only policymaker to oppose Thursday’s cut, said that inflation was stickier than the ECB predicted, so the bank needed to act more cautiously in the future.

Tricky few months

ECB Vice President Luis de Guindos said that inflation could still rise from current levels before dropping back to 2% towards the end of next year, making the next few months difficult.

“There will be months when inflation may even accelerate slightly but we are convinced that next year it will converge with the target,” he told Spanish radio station Onda Cero.

“The coming months will not be easy,” he said.

While most policymakers refrained from making policy predictions, Lithuania’s Gediminas Simkus suggested there could be room to ease further this year.

When asked if further monetary easing this year was possible, Simkus said: “If the economy develops according to forecast, I think so, yes”.

Markets see between one and two cuts this year and a total of four cuts between now and the end of next year in the 3.75% deposit rate.

Economists argue that any rate at or above 3% restricts economic growth so ECB policy will continue to hold back the economy well into next year.

The closest ECB President Christine Lagarde came to predicting future moves on Thursday was when she said there was a “strong likelihood” that Thursday’s cut was not a one-off but rather the start of a dialling back process.

Policymakers speaking to Reuters on Thursday, however, said that any step in July is highly unlikely and the next possible window to cut rates would be in September, provided data in the run up to that meeting supported such a move.

ECB board member Isabel Schnabel, who has already called for a pause in July, nuanced her words on Friday, steering clear of any specific comment on the next meeting.

“As the future inflation outlook remains uncertain, we cannot pre-commit to a particular rate path,” she said.

Article Source – ECB policymakers warn about inflation challenge – RTE

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