Betting that the European Central Bank (ECB) cuts interest rates in the first half of next year would be a mistake, according to bank governing council member Martins Kazaks.
Wage growth in the euro zone hasn’t yet peaked and it’s unclear how quickly underlying inflation will retreat, the head of Latvia’s central bank said. Last week’s decision to lift borrowing costs for a 10th straight time puts the ECB more solidly on track to reach its 2 per cent target in 2025 but it’s too soon to exclude another hike.
“The market shouldn’t expect that we would jump too early to cut rates,” Mr Kazaks said in an interview. “We’ll start cutting rates when we see that we consistently and significantly start to undershoot our target and what I can say clearly is that expectations of a rate cut in spring or early summer, in my view, are not really consistent with the macro scenario that we have.”
Traders are starting to price cuts from April of next year and some economists see them as early as June.
Projections presented last week show that inflation in the 20-member euro area will take another two years to reach 2 per cent, even as price pressures are set to slow sharply in the coming months. The economy is seen returning to quarterly growth rates of 0.4 per cent in 2024 after stagnating for most of 2023.
Mr Kazaks – speaking in Santiago de Compostela, Spain, where he attended a meeting of European finance chiefs – described this outlook as “one of a soft landing” in which unemployment rises only marginally. “Our latest hike could strengthen this scenario.”
Following Thursday’s increase, the ECB’s deposit rate now stands at a record 4 per cent and the lending rate at 4.5 per cent. ECB president Christine Lagarde said a “solid majority” supported the move that traders didn’t see coming until 48 hours before the decision – and even then, only just. Most economists predicted a hold.
Since then, many of the ECB’s 26 officials have shared their views on where policy should be heading next. Estonia’s Madis Muller said in a separate interview there’s a “good chance” policymakers have done enough. Austria’s Robert Holzmann and Slovenia’s Bostjan Vasle argued another hike can’t be excluded, while Greece’s Yannis Stournaras said he already would have preferred to keep rates unchanged last week.
“While I’m comfortable with where rates are at the moment, if necessary we will take the right decisions,” said Mr Kazaks. “To say we’re at the peak – I don’t think we can do that.”
Ms Lagarde argued similarly following the ECB’s decision and, when asked about chances of a rate cut, said it’s “not even a word that we have pronounced”.
[ Lagarde seized ECB colleagues’ handsets to prevent leaks, say sourcesOpens in new window ]
“I repeat, we have not decided, discussed or even pronounced cuts,” she said in Santiago de Compostela.
The euro zone’s inflation outlook – despite its improvement – remains a concern for policymakers. While the headline rate has halved from last year’s 10.6 per cent peak, a measure stripping out volatile elements such as food and energy, Mr Kazaks argues, “still leaves us with a lot of questions and a lot still needs to happen”.
“I would like to see that we solve inflation in one attempt, that we are not forced to come back,” he said. “Because later on, it would simply just be requiring larger interventions.”
If, as a result of the ECB’s determination, inflation retreats to 2 per cent sooner than expected, that’s “okay,” he said. “But I wouldn’t want to see it happen any later.” – Bloomberg
