The ECB cut rates last Thursday for the first time since 2019 but held back from any promise to follow up its move, even if ECB President Christine Lagarde suggested this was the first step in a series of cuts.
“In a world of uncertainty, one way to deal with uncertainty is a little bit of waiting; wait and make sure you’re not taking a step you’re going to regret,” Lane told an event in Dublin.
Lagarde said on Monday the ECB could at times wait more than one meeting before cutting rates again, and all the commentary about the virtue of patience has been seen as a signal that rates will remain unchanged next month.
Lane argued that wage growth is the key unknown and this warrants keeping rates high enough to restrict growth.
“The high level of uncertainty and the still-elevated price pressures that are evident in the indicators for domestic inflation, services inflation and wage growth mean that we will need to maintain a restrictive monetary stance,” Lane said in his speech in Dublin.
Markets see little more than one rate cut over the second half of the year and between three and four moves over the next 18 months.
“What we’re trying to say is (that) we will be agile. If we think they (data) have moved in one direction, we will do more. If we see that they have moved in another direction, we will do less,” Lane said.
WAGE GROWTH
Lane, the architect of ECB policy decisions, added that the ECB is not committing to any further policy easing after last Thursday’s rate cut, and any follow-up moves will depend on incoming data and decisions will be taken meeting-by-meeting.
Lane said that wage growth — the key driver of inflation — is elevated as firms adjust wages in response to past inflation but he was expecting a slowdown next year.
“This negatively-sloped profile for wage growth helps to underpin the projected decline in inflation in 2025, with less pressure from labour costs next year,” Lane said.
Lane added that corporate profit margins were also set to shrink further and that too would absorb some of the wage increases, taking pressure off consumer prices.
While economic growth has picked up, this does not seem to be threatening to boost price pressures since demand in sectors most sensitive to interest rates remains subdued.
Source: Economy - investing.com
