FRANKFURT (Reuters) – Inflation in the euro zone remains stubbornly high and the European Central Bank (ECB) should therefore resist any temptation to cut interest rates early, Bundesbank President Joachim said on Friday Nagel, statements echoed by another member of the ECB Governing Council, Isabel Schnabel.
The ECB has kept interest rates at a record low since last September and is currently refusing to open the debate on a rate cut, arguing that wage growth is still too fast for it to begin to relax its restrictive monetary policy.
Investors were betting a few weeks ago on a 150 basis point rate cut in 2024, but expectations have fallen back and now stand at just 88 basis points with the first move expected in June, an unusually large change in market expectations.
“Even though it may be very tempting, it is too early to cut interest rates,” Joachim Nagel said in a speech.
“We will only have a more detailed picture of the evolution of domestic price pressures during the second quarter,” he added. “We can then consider a reduction in interest rates.”
Isabel Schnabel, Germany’s other representative on the Governing Council and an equally influential voice, was also circumspect on Friday, saying the latest efforts to bring inflation back to target could be more difficult than expected.
“We have to be careful…: there are reasons to think that the last kilometer will be more difficult,” she told an academic conference in Milan.
Isabel Schnabel also argued that, with markets already anticipating significant rate cuts, financial conditions had already eased considerably and warranted caution.
The member of the Governing Council nevertheless pointed out that companies were starting to absorb part of the growth in remuneration, which gives hope that a wage-price loop will not set in.
The ECB has long warned that figures on wage deals for 2024 will not be published until May and so the June meeting will be the first opportunity for policymakers to have evidence of slowing wage growth.
However, the ECB has already argued that falling energy prices alone would likely justify a reduction in inflation expectations, so projections due in March are likely to show a more favorable picture.
An early rate cut risks failing to reach the 2 percent inflation target and could, in an extreme case, force the ECB to raise rates again, a mistake that would be costly, Nagel said.
Inflation is now below 3% in the euro zone.
(Report by Balazs Koranyi, French version by Diana Mandiá, edited by Blandine Hénault)
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