Klaas Knot, Governor of ABN Amro, on the sidelines of the Group of 20 (G-20) Finance Ministers and Central Bank Governors meeting in Gandhinagar, India, Tuesday, July 18, 2023.
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LONDON – European Central Bank Governing Council member Claes Nott said the region will ease monetary policy “soon” but warned the process would need to be done slowly to rein in inflation.
“It will soon be possible to appropriately relax the current restrictive monetary policy stance and gradually lift the brakes… Policy rates will slowly but gradually move to less restrictive levels,” said Dutch central bank governor Notte, who held the Barker meeting in London on Tuesday. Le-CEPR International Monetary Policy Forum.
Many ECB policymakers are adamant that the first rate cut of the current cycle will come at next week’s June meeting, leading money markets to fully price in this scenario. A Reuters poll of 82 economists this week said all said they expected a rate cut in June.
But the outlook is uncertain, especially given the stickiness of service-sector inflation in the euro zone and the bleak global picture.
While the ECB was the last of the three to start raising rates, it will now almost certainly start cutting rates before the Fed and Bank of England, both of which have said further progress is needed to reduce inflation.
Markets have fully priced in just one more rate cut by the European Central Bank for the rest of the year, a sharp revision from expectations at the start of the year that it would cut rates as many as six times starting in the spring. In the same Reuters poll, a majority predicted the ECB would cut interest rates two more times in September and December.
Knott, usually known for his hawkish stance, said on Tuesday there had been “clear deflation” since peaking above 10% in late 2022, particularly on goods inflation. However, he said the next phase of the process could be “more volatile” due to base effects in energy prices and the removal of government fiscal support programs.
What happens after June depends on the data
Nott said the interplay between inflation expectations, market pricing, economic growth data, the labor market and productivity, and the ECB’s own quarterly forecasts meant it was not yet possible to commit to a specific path for rate cuts in the second half of the year.
“The precise timing, pace and scale of easing must also follow a data-dependent approach… Labor market data is a key factor in our forecasts,” he said.
Nott noted that the ECB’s last staff forecast, released in March, suggested that three to four rate cuts this year would be appropriate, similar to what markets were pricing in at the time.
“While the latest figures from the new wage deal do suggest that wage growth has slowed somewhat since the end of 2023, wage growth unfortunately remains relatively high. Based on forward-looking indicators, the road to 2024 is expected to remain quite bumpy,” Knot said.
“Productivity growth remains low and has not picked up yet. Therefore, we will have to wait for the next round of forecasts in June, which will provide us with an updated assessment of the outlook for inflation and the attendant balance of risks.”
Preliminary Eurozone inflation data for May will be released on Friday, and the European Central Bank will make its next monetary policy decision and forecast on June 6.
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