FRANKFURT, 7th June, 2024 -- European Central Bank officials offered wary assessments on the prospect for further interest-rate cuts, seeking more evidence of progress on inflation to be sure that any easing is warranted, Bloomberg reported on Friday.
A day after the Governing Council delivered on its promise to lower rates but revealed a consumer-price forecast that left investors querying where policy is headed next, governors from around the region signalled that they are now back in a watchful phase rather than poised for action.
“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 told Aripaev radio on Friday, while his Latvian colleague Martins Kazaks observed that “victory is not yet in hand” over inflation. Bundesbank chief Joachim Nagel said the ECB should not be “on autopilot” about lowering rates.
While each of those officials has been in the Governing Council’s hawkish camp over the past couple of years, the remarks underscore how the aftermath of a bold decision to diverge euro-zone monetary policy from the path of the US Federal Reserve has left the ECB in a tentative and hesitant mood about further action.
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 percent target, prompting questions from journalists on why she went through with the move.
She fell back on the central bank’s normal 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 the hawkish policymakers seem to agree with.
Austria’s Robert Holzmann went on the record on Thursday, saying he opposed the rate reduction. “Data-driven decisions should be data-driven decisions,” he said via a spokesman after Lagarde revealed that there had been one dissenter.
“Although inflation has been pushed down to a fairly low level, victory is not yet in hand,” Kazaks, the Latvian central-bank chief, said in a blog post on Friday. “Domestic price pressures remain strong. The labour market is tight and unemployment is low, which keeps upward pressure on wages.”
Muller said that he does not want to “speculate about the next decisions, which really depend on how the economy will actually develop.” Bostjan Vasle, the Slovenian central bank governor, repeated a line from the ECB’s policy statement saying that there won’t be a precommitment to a particular path for borrowing costs.
Echoing that was Vice President Luis de Guindos. Speaking on radio in Spain, he observed that the ECB faces a huge level of uncertainty and will act depending on data and its own forecasts.
That may be so, but officials are already all but excluding a second cut in July, and some also question if such a step would be wise at the following meeting in September, according to people familiar with the matter.
Gediminas Simkus, the Lithuanian central bank chief, 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 us wait and see,” he said.