ECB officials keep giving mixed signals on where interest rates are heading next
With less than a week until the European Central Bank’s (ECB) next policy meeting, European policymakers still can’t get their stories straight about where interest rates are heading next.
In a speech in Tallinn, Estonia, ECB board member Isabel Schnabel said the recent decline in headline inflation “understates the challenges monetary policy is facing.”
She is referring to stubborn service inflation, which remains way above the ECB target. Although headline inflation fell to a 2.2% annual rate in August, service inflation hit 4.2%—the highest since last October.
Because of that, Schnabel said the ECB shouldn’t abandon its efforts to tame inflation “too early.”
Around the same time, ECB board member Piero Cipollone gave an entirely different take, arguing that the biggest risk is keeping interest rates high for too long.
“We must ensure that inflation converges to our target without holding back the economy unnecessarily because we desperately need investment and growth in Europe,” Cipollone said, speaking to Bloomberg.
“Every delay in this area puts us at a serious disadvantage.”
Cipollone’s concerns reflect the dismal growth rate of the eurozone economy.
The bloc expanded just 0.3% in the second quarter and is expected to grow a paltry 0.9% in 2024, according to the latest projections from the International Monetary Fund.
The ECB is being pulled in multiple directions
After cutting interest rates in June for the first time in five years, ECB officials have struggled to define the best course of action for the eurozone.
On one hand, there's stubborn service inflation that isn't giving out. On the other hand, the economy is slowing, putting the bloc at risk of a recession.
Nevertheless, the ECB’s executive board is more likely to side with Cipollone than Schnabel, with the central bank widely expected to cut rates later this month.
Ed Smith, co-chief investment officer at Rathbones Asset Management, expects the ECB to continue lowering interest rates as regional wages stagnate or decline.
Economists say stagnant wages could eat into disposable income, leading to a downturn in consumer spending that threatens to put the region back on a recessionary path.
“Negotiated wages are a big thing in the eurozone, [accounting] for about 80% of the workforce,” Smith told CNBC.
“Big drop in eurozone-wide negotiated wages in the second quarter, falls in other indicators like the Indeed.com listings […] the ECB’s telephone survey of businesses [...] also points to falling wage intention,” he said.
If this scenario plays out, policymakers may soon have to worry about inflation falling below their 2% target, according to ECB sources who spoke with Reuters.
They said the central bank may be "behind the curve" in cutting interest rates, which means further reductions are expected throughout the year.
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