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12th Apr 2024

'Swiftly dial back' interest rates, ECB told

  • Executive board member of the European Central Bank Piero Cipollone (Photo: Angela Morant / ECB)
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Italy's Piero Cipollone stated that the European Central Bank should be ready to "swiftly dial back our restrictive monetary policy stance" in his first monetary policy speech since joining the ECB's board in November.

His speech at an event in Brussels on Wednesday (27 March) can be read as an argument to start cutting interest rates at the central bank's next meeting in April.

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Wages as a percentage of the economy remain lower than the average before the pandemic and energy crisis, failing to keep pace with rising prices. While there has been some recovery in wages, the rate of growth is beginning to decelerate.

Cipollone cautioned that if this slowdown persists, workers could face a scenario of permanently lower wages.

Some central bankers are worried that inflation might pick up again if interest rates are cut too soon.

Dutch central banker Klaas Knot, who is considered a monetary hawk, warned in January that wage growth needed to slow down before the bank could consider lowering interest rates.

The basis for this is an ECB staff analysis which suggests that a 1 percentage point increase in wages pushes up core inflation by around 0.5 percentage points.

But Cippolone in apparent disagreement warned that this projection is subject to "substantial uncertainty and takes time to fully materialise" and pointed out that higher wages are also a good thing.

"An excessive focus on short-term wage developments may not take into full consideration the recovery in wages that can — and needs to — take place for the euro area's currently fragile recovery to gain a stronger footing," he said.

Wage growth has trailed productivity gains in Europe since the fourth quarter of 2021, and substantial reductions in food and energy prices allow for wages to rise without driving up overall core inflation, he said.

He also noted that there is "room for rebalancing" in the shares of wages and profits as firms were able to increase selling prices, securing higher profit margins.

Choosing his words carefully he said that more data would give further insurance against surprise "upside risks to inflation" but said that the EU's economy had stagnated for 18 months and that inflation has already dropped to 2.6 percent, the lowest it has been in over two years.

This "strengthens the case for adjusting our policy rates," he said.

"If we hold them for too long, we might put the recovery at risk and delay the rebound in productivity growth," said Cippolone.

Whether he will get his way is uncertain as more hawkish central banker's like Knot and the conservative Austrian central bank chief Robert Holzmann have indicated they do not expect lowering borrowing rates before June.

ECB president Christine Lagarde has said she will not commit to a path of rate cuts.

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