PARIS (Reuters) – European Central Bank (ECB) officials warned on Friday that it could be difficult to bring inflation back below 2% but were confident about the effectiveness of monetary policy.
The Frankfurt institute on Thursday lowered its three key interest rates by 25 basis points and raised its inflation forecasts for 2024 and 2025, giving little indication of the future trajectory of its policy.
Bank of Austria Governor Robert Holzmann – the only official to vote Thursday against a rate cut – said inflation was more stubborn than expected and that the ECB needed to act more cautiously in the future.
Officials in Frankfurt are particularly monitoring developments in the services sector, ECB President Christine Lagarde said.
“We are going to look very carefully at the service sector (…) which is the most labor intensive, it is the one which is most determined by salaries,” she declared in a broadcast interview Friday by BFMBusiness.
“We know today that wages in the euro zone, in Germany in particular, have been high, will remain high for the rest of 2024 and will start to fall, to decline in 2025,” she said. added.
“So we will be very attentive to all the data relating to salaries, relating to services, relating to productivity and relating to profits,” said Christine Lagarde.
The ECB predicts that part of the companies’ margins will make it possible to absorb wage increases, thus preventing a repercussion on prices, a scenario of an inflationary spiral “which we of course want to avoid”, indicated the president of the ECB. ‘institution.
According to data published on Friday, wage growth in the euro zone reached 5.1% in the first quarter, an acceleration compared to the 4.9% increase recorded in the previous quarter.
“There will be months when inflation could even accelerate slightly,” ECB Vice-President Luis de Guindos warned on Friday. “But we are convinced that next year it will converge towards our objective,” he said on Spanish radio Onda Cero.
The governor of the Bank of France, François Villeroy de Galhau, also spoke on Friday of “monthly ups and downs” on inflation between now and the end of 2024, linked largely according to him to base effects on energy.
“Barring an external shock, inflation will return to around 2% by next year, and undoubtedly in France a little faster than the European average,” he said in a press release.
“We will adapt the precise pace of the next rate cuts, without haste or procrastination, as the future prospects of disinflation are confirmed,” he added.
WAITING FOR THE FED
After the ECB’s decision to lower its rates, which followed those of the Bank of Canada, the Bank of Sweden and the Swiss National Bank, eyes are turning to the American Federal Reserve which is holding its monetary policy meeting on June 9 and 10.
The Fed has been less confident in recent weeks that inflation is slowing, prompting economists and market participants to delay their expectations for monetary easing – with the September date for a first rate cut now being mentioned.
Asked about the fact that the ECB had reduced its rates before the Fed, Christine Lagarde indicated that “that had not really been the debate”.
“Our objective is price stability, it is the fight against inflation. To the extent that all the data that comes back (…) tell us that we will reach 2% in 2025, this gives us leads to this decision being made, we will see what the other central banks will do.”
(Written by Blandine Hénault, with Bertrand Boucey, Diana Mandia and Leigh Thomas in Paris, Stine Jacobsen and Anne Kauranen in Copenhagen, Miranda Murray and Matthias Williams in Berlin)
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