European Central Bank President Christine Lagarde urged caution against hasty interest-rate cuts as she highlighted the increasing influence of rising salaries on inflationary pressures.
Speaking to European Union lawmakers in Brussels, Lagarde emphasized the need for policymakers to tread carefully, noting that while disinflation is expected to persist gradually in 2024, uncertainties remain regarding whether price increases will effectively return to the 2% target.
Lagarde stressed the importance of avoiding premature decisions that could potentially exacerbate inflationary trends, underscoring the necessity for more substantial evidence to instill confidence in achieving and maintaining the medium-term inflation target. She emphasized, "The last thing that I would want to see is us making a hasty decision to see inflation rise again and have to take more measures."
This cautious approach comes amidst ongoing debates within major central banks globally on when to reverse the rate hikes implemented to curb inflation, without risking a resurgence in prices.
In Frankfurt, officials are deliberating between implementing an initial rate cut in either April or June, with a majority publicly leaning towards the latter date, seeking additional clarity on salary and corporate profit developments across the euro zone.
Following Lagarde's remarks, German bonds experienced slight gains, pushing 10-year yields to a one-week low of 2.30%. Additionally, money markets adjusted their expectations, favoring five quarter-point rate reductions this year instead of four, with the first potentially occurring by June.
Lagarde specifically highlighted the increasing significance of salaries as a driving force behind inflation dynamics in the upcoming quarters. While the ECB's forward-looking pay tracker continues to indicate strong inflationary pressures, recent agreements suggest some stabilization in the final quarter of 2023.
She noted, "Wage pressures for 2024 hinge particularly on the outcome of ongoing or upcoming negotiation rounds that affect a large share of euro-area employees."
Furthermore, Lagarde pointed out that the inflationary contribution of corporate profits has been diminishing, indicating that wage hikes may be partially offset by profit margins.
Despite this, Executive Board member Isabel Schnabel warned against premature rate cuts, citing persistent services inflation, a resilient labor market, relaxed financial conditions, and geopolitical tensions as potential risks to price stability.
While some officials advocate for delaying rate cuts to avoid exacerbating inflationary pressures, others express concerns about the economic downturn and the elusive 2% inflation target.
Fabio Panetta of Italy emphasized the necessity for policy easing in the near future. However, Spain's Pablo Hernandez de Cos believes there is still time before such actions should be taken.
Many observers anticipate inflation to decline more rapidly than current ECB projections suggest, with core inflation gradually decreasing, although the services component shows signs of persistence.
Lagarde acknowledged the fragile state of the economy, which narrowly avoided recession in the latter half of 2023. Eurostat data revealed stagnation in the euro zone's fourth quarter, with weak prospects for growth in 2024, as indicated by recent European Union forecasts.
Lagarde noted, "Incoming data continue to signal subdued activity in the near term, however, some forward-looking survey indicators point to a pick-up in the year ahead" as we read in Bloomberg and Yahoo Finance.
15.02.2024
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