ECB governors insist there is no clear path to future interest rate cuts
Markets pared back bets on the extent of further rate cuts this year, and Central Bank governor Gabriel Makhlouf said the ECB is confident that disinflation is working but added: 'It doesn’t mean, incidentally, that we know how fast we’re going to carry on or if at all.
European Central Bank governors have repeated the party line that there can be no guarantee of a rapid fall in interest rates.
A day after the ECB’s governing council delivered on its promise to lower rates but revealed a consumer-price forecast that left investors querying where policy is headed next, data showed accelerating wage increases — and governors signalled that they’re now back in a watchful phase.
“The central bank needs to make its decisions rather cautiously and not to rush too much with cutting the interest rate,” Estonia’s Madis Muller said on Friday, while Gabriel Makhlouf, the governor of Ireland’s Central Bank, said policymakers don’t know “how fast we’re going to carry on, or if at all”. The remarks underscore how the aftermath of a bold move to diverge eurozone monetary policy from the path of the US Federal Reserve has left the ECB in a tentative and hesitant mood about its next step.
The decision on Thursday was only the second so far by a Group-of-Seven central bank to lower borrowing costs after the Bank of Canada’s move on Wednesday, but was also easily the most awkward of the two.
ECB president Christine Lagarde unveiled forecasts that showed officials will now take longer to bring inflation back to their 2% target, prompting questions from journalists on why she went through with the move.
She fell back on the central bank’s mantra that it will take “data dependent” decisions on a “meeting-by-meeting” basis.
Paying full heed to that would preclude clear signals on the next step, an approach hawkish policymakers particularly agree with. One data point they’re focusing on is wages.
On Friday, the ECB’s preferred measure showed acceleration at the start of 2024, with compensation per employee rising by 5.1% from a year ago in the first quarter, up from a revised 4.9% in the previous three months. “Domestic price pressures remain strong,” Latvian central bank chief Martins Kazaks said in a blog post. Mr Kazaks added:
Traders pared wagers on the extent of rate cuts from the ECB, with just 33 basis points seen for the remainder of this year — equivalent to one more quarter point move and a one-in-three chance of a further reduction. Three quarter-point reductions were virtually fully priced as recently as late May.
German bonds fell modestly for a second day, sending the 10-year yield two basis points higher to 2.57%, which is still below the recent high of 2.71%.
The yield on the Irish 10-year bond traded at 3%, up from the previous session.
Austria’s Robert Holzmann, the sole dissenter against the rate decrease, said on Friday that the move this week was a hawkish cut, meaning that the governing council will be “somewhat more cautious in the future”. Many colleagues seem to conform to that description.
“We’re now confident that the disinflation process is working,” Mr Makhlouf said. “It doesn’t mean, incidentally, that we know how fast we’re going to carry on or if at all because — this is the phrase we’ve been using — ‘the road is bumpy’,” he said, repeating a phrase used by Ms Lagarde on Thursday.
While Finnish central bank chief Olli Rehn insisted that inflation is predicted to reach its 2% target in the next year, Mr Kazaks cautioned that “victory is not yet in hand”.
Bundesbank chief Joachim Nagel said the ECB shouldn’t be “on autopilot” about lowering rates. Slovenia’s Bostjan Vasle and Mario Centeno of Portugal repeated that officials won’t pre-commit to a particular path for borrowing costs, a point echoed by executive board member Isabel Schnabel.
Vice president Luis de Guindos told Spanish radio that the Governing Council faces a huge level of uncertainty and will act depending on data and its own forecasts.
France’s Francois Villeroy de Galhau also stayed non-committal, saying:
Christodoulos Patsalides of Cyprus said: “Maintaining optionality is key to successfully steering inflation to its medium-term targeted level.” That may be so, but officials are already all but excluding a second cut in July, and some question if such a step would be wise at the following meeting in September, according to people familiar with the matter.
Lithuanian central bank chief Gediminas Simkus declined to offer a view on the July decision when questioned in Vilnius, saying only that the ECB needs “strategic patience” to assess data arriving in the next month or two.
If economic trends turn out in with ECB forecasts, “there will be more cuts” but “when, at what speed, what trajectory — let’s wait and see,” he said.
- Bloomberg. Additional reporting Irish Examiner
CONNECT WITH US TODAY
Be the first to know the latest news and updates
