There is no urgency for the European Central Bank to cut interest rates more quickly and it could even live with a slight temporary overshoot of its inflation target, the bank’s chief said Belgian central office, Pierre Wunsch, thus joining his colleagues who rejected the most pessimistic points of view.
In recent days, ECB officials have expressed very different views on prices and policy, with some fearing that inflation will fall below 2% and require the ECB to act quickly, while others have declared that the risks were more balanced and that the bank must therefore continue to act with extreme caution.
“Employment is high, real wages are increasing and a soft landing remains the most likely outcome. There is therefore no urgency to further accelerate the easing of monetary policy,” Wunsch said at the meeting. from an interview with Reuters.
The comments come after Portuguese central bank chief Mario Centeno said a 50 basis point cut in the interest rate should be among the options on the table in December and Italy’s Fabio Panetta said it was not certain whether the ECB would be able to stop cutting rates once it reached a neutral level, that is, when it would no longer hold back growth.
Markets are currently pricing in a 35 basis point rate cut for December 12, indicating that investors see a 40% chance that the ECB will deliver a 50 basis point cut after three declines of 25 basis points this year.
Mr Wunsch acknowledged that inflation could fall back to the ECB’s target by mid-2025, earlier than expected at the end of the year, but that there was no major risk a lasting fall below 2%.
A faster fall in inflation would justify further rate cuts, but these should remain gradual until restrictions on the economy are lifted.
Mr Wunsch also argued that the ECB does not normally take into account fluctuations in inflation due to temporary volatility in energy prices and should adopt a truly symmetrical approach by taking into account fluctuations in energy costs. energy in both directions.
“If the economy is holding up and operating at its potential, but we are temporarily below expectations due to a positive terms of trade shock, I am OK with that and we should not dramatize such an event,” he said. “Being a little below 2% is not a major event if the medium term continues to point towards 2%.
Mr Wunsch also said core inflation, which filters out energy costs, could be a better indicator of how much the ECB is restricting the economy, as it gives a better indication of wage pressures, particularly in services, the largest group in the consumer price basket.
“I would say that core inflation data, rather than headline numbers, can give us a better indication of how tight policy is,” Mr. Wunsch said.
Mr. Wunsch also cautioned against getting ahead of the curve in December, as major events and data releases in the coming weeks will have significant repercussions on the economy.
“We will have a lot of information between now and then, including two more inflation readings and new staff projections,” he said. “There will be the US elections and we also need to see how the conflict in the Middle East evolves, so it is premature to discuss precise levels.
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