FILE PHOTO: A view of the European Central Bank headquarters in Frankfurt, Germany March 16, 2023. REUTERS/Heiko Becker/File Photo
Brussels: European Central Bank (ECB) officials are becoming more vocal about the need for additional evidence that inflation is returning to their 2% goal before they can start lowering interest rates.
Speaking last Friday, several policymakers highlighted that monetary easing can’t begin until more data arrives in the coming months – especially on wages, whose growth remains high even after a slight moderation in the fourth quarter.
That sort of information will only trickle in slowly, and probably not in time for a first reduction in borrowing costs at a meeting in April, according to Greek central-bank chief Yannis Stournaras, normally one of the more dovish voices on the ECB’s Governing Council.
“The latest deceleration in wages gives hope that we are on track,” he said in an interview. “But we won’t have enough information to decide on rate cuts before the end of the second quarter – so June.”
With inflation in retreat and the eurozone economy struggling to gain momentum, the debate about when to start undoing the ECB’s historic rate-hiking campaign has become more intense. Some policymakers have suggested they’d be ready to make a move in April, though many have signalled a preference for waiting and making sure that inflation doesn’t rebound.
Investors have long speculated that the ECB will go with the earlier option after a stronger-than-expected slowdown in price increases. But they’ve pared back their bets recently after repeated pushback from more hawkish officials and now view a first step in June as more likely.
Speaking in the Belgian city of Ghent, ECB president Christine Lagarde said slower pay growth in the fourth quarter was “encouraging,” but that bargaining rounds in the first quarter will be key for decisions on rates.
“There are many sectors and employees that are covered by negotiations that will be completed in the course of the first quarter of 2024,” Lagarde told reporters at a meeting of euro-area finance chiefs and central bank governors. “I think that those numbers will – especially if they continue to be encouraging – will be important for us to assess going forward in order to reach confidence.”
While data on workers’ salaries in the euro area are crucial for the inflation outlook, they only become available with a long lag. That’s making the decision for the Governing Council more complicated, as they must also consider the danger of squeezing a feeble economy for too long.
But many officials are signalling that they’re ready to wait for the necessary information to arrive.
“Wage growth may go in the wrong direction in the sense that there may be too much of a catch up,” Irish central-bank governor Gabriel Makhlouf said in an interview, pointing to an “amazingly resilient” labour market and prospects that economic growth might pick up in the second half. “If I can, I prefer to take decisions based on a clear picture.”
Bundesbank president Joachim Nagel also argued that the ECB must resist the temptation to cut rates too early.
“We will only receive a more detailed picture of how domestic price pressures are unfolding during the second quarter,” he said in Frankfurt. “First of all, we need clearer evidence that we will achieve our target – reliably and soon. Then we can contemplate a cut in interest rates.”
Similarly, Madis Muller of Estonia cautioned against moving too early, saying “it would be prudent to be patient with the first rate cut”.
“Wage growth is still higher than what we would like to see to be sure it’s consistent with our inflation target,” he said in an interview, adding that he would be “more comfortable to wait for first-quarter data to be able to say confidently that all indicators suggest we can lower rates”.
Those figures only start trickling in from April, probably too late for the ECB monetary policy meeting at the start of that month and putting the focus on June.
That chimes with the schedule set out by Lithuania’s Gediminas Simkus, who said in an interview that “positive developments on wages and inflation” could “allow us to move into the less restrictive area in summer 2024”. — Bloomberg
