(Bloomberg) — Betting that the European Central Bank will cut interest rates in the first half of next year would be a mistake, according to Governing Council member Martins Kazaks.
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Latvia’s central bank chief said wage growth in the euro zone has not yet peaked and it is unclear how quickly underlying inflation will retreat. Last week’s decision to raise borrowing costs for the 10th consecutive time puts the ECB more firmly on track to reach its 2% target in 2025, but it is too early to rule out another hike.
“The market should not expect that we will jump too quickly to cut rates,” Kazaks said in an interview. “We will begin cutting rates when we see us begin to consistently and significantly fall short of our target, and I can say frankly that expectations for a rate cut in the spring or early summer are realistic in my view.” “are not consistent with the macro scenario that we have.”
Traders are seeing price cuts starting from April next year and some economists see it as early as June.
Projections presented last week suggest it will take another two years for inflation in the 20-member euro zone to reach 2%, even though price pressures will slow sharply in the coming months. The economy looks set to return to a 0.4% quarterly growth rate in 2024 after remaining stagnant for most of 2023.
Kazaks – speaking in Santiago de Compostela, Spain, where he attended a meeting of European finance chiefs – described the approach as “one of a soft landing” in which unemployment rises only modestly. “Our latest increase may strengthen this scenario.”
After Thursday’s increase, the ECB’s deposit rate is now at a record 4%. President Christine Lagarde said a “solid majority” supported the move, which traders did not see coming until 48 hours before the decision – and even then only just. Most economists predicted a halt.
Since then, many of the 26 ECB officials have shared their views on where policy should go next. Estonia’s Madis Muller said in a separate interview that there is a “good chance” that policymakers have done enough. Austria’s Robert Holzmann and Slovenia’s Bostjan Vasley argued that another hike could not be ruled out, while Greece’s Yanis Stournaras said already last week he would prefer to keep rates unchanged.
“While I am comfortable with where rates are at this time, we will make the right decision if necessary,” Kazaks said. “To say we are at the extreme – I don’t think we can do that.”
Lagarde made a similar argument after the ECB’s decision and asked about the prospects for a rate cut – adding that it was “not even a word we have said.”
“I repeat, we have not made any decisions, have not discussed or even announced any cuts,” she said in Santiago de Compostela.
The euro zone’s inflation outlook – despite the improvement – remains a matter of concern for policymakers. While the headline rate has halved from last year’s 10.6% peak, a measure that strips out volatile elements like food and energy, Kazaks argues, “we still have a lot of questions and a lot more still needs to happen.” Is.”
“I would like to see us address inflation in one go, so that we are not forced to come back,” he said. “Because it will require major intervention later.”
If, as a result of the ECB’s determination, inflation falls to 2% sooner than currently expected then that would be “fine,” he said. “But I wouldn’t want to see it happen later.”
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