After the first rate cut in 5 years, the ECB chief is getting cold feet
In the wake of the first rate cut in almost five years, the European Central Bank (ECB) is shying away from any bold predictions about what comes next.
According to ECB President Christine Lagarde, “sticky services inflation” remains a concern for the eurozone and needs close monitoring to ensure that the central bank doesn’t cut rates too quickly.
While the eurozone was “very advanced” on its path to curbing inflation, service costs hadn’t “budged,” largely because wages are still rising at a brisk pace, Lagarde said.
As Bloomberg noted, Lagarde refused to comment on the ECB’s rate path moving forward, probably because she doesn’t want to box the ECB into another corner tied to interest rate expectations.
Shortly after the ECB cut rates on June 6, Creditnews reported that several high-ranking central bank officials were questioning the decision.
The Governor of the Central Bank of Ireland, Gabriel Makhlouf, said he still doesn’t know “how fast we’re going to carry on, if at all” in terms of rate cuts.
Meanwhile, Bundesbank President Joachin Nagel said nobody should expect the ECB to be on “autopilot” regarding additional cuts because inflation remains too high.
Nearly a month after that decision, ECB officials don’t appear to be any more confident that they made the right choice.
Inflation and its discontents
Several “conservative” ECB members regret cutting interest rates in June, saying the ECB is sending the wrong message to the public, according to Reuters.
The latest batch of inflation data also signals that policymakers may have gotten ahead of themselves.
According to the European Union’s statistics agency, annual inflation in the 20-nation eurozone eased to 2.5% in June from 2.6% the previous month.
Meanwhile, core inflation—which excludes food and energy prices and is a more preferred inflation gauge for policymakers— rose 2.9% annually, which was higher than expected.
The service inflation that Lagarde warned about increased 4.1% year over year. That’s a notable rebound from April, when annual service inflation dropped to 3.7%.
“We still have questions about services inflation,” ECB chief economist Philip Lane said in an interview with Bloomberg. “These data do not settle that. We need some additional time.”
Kyle Chapman, a foreign exchange analyst at Ballinger Group, echoed those concerns. In his view, the ECB will hold off on additional rate cuts for now.
“The stickiness in services inflation may start to become a real concern for policymakers that puts a spanner in the works for rate cuts, particularly given the backdrop of rising wage growth and falling unemployment,” Chapman said.
“There has been no concrete downtrend in services inflation this year, and the ECB isn’t likely to cut rates significantly until one emerges,” he explained.