ECB must resist early rate cut temptation: Nagel

By Thomson Reuters Feb 23, 2024 | 4:07 AM

FRANKFURT (Reuters) – Euro zone inflation remains stubbornly high so the European Central Bank should resist any temptation to cut interest rates early, especially before crucial economic data in the second quarter, Bundesbank President Joachim Nagel said on Friday.

The ECB has kept interest rates at a record high since last September and consistently pushes back on rate cut talk, arguing that wage growth is still too quick for it to sound the all-clear and start unwinding restrictive policy.

Investors are also coming around to this message. They were betting on 150 basis points of rate cuts in 2024 just a few weeks ago, but expectations have receded and now stand at just 88 basis points with the first move seen in June, an unusually large swing in market expectations.

“Even though it may be very tempting, it is too early to cut interest rates,” Nagel said in a speech.

“We will only receive a more detailed picture of how domestic price pressures are unfolding during the second quarter. Then we can contemplate a cut in interest rates.”

The ECB has long argued that crucial figures on 2024 wage settlements will only come out in May, so the June meeting will be the first occasion policymakers will have evidence if rapid wage growth is slowing.

Still, the ECB has already argued that lower energy price alone likely warrant a cut in inflation expectations, so new projections due in March should paint a more benign picture.

An early rate cut runs the risk of missing the inflation target and could, in an extreme case, force the ECB to raise rates again, a costly blunder, Nagel argued.

Inflation is now below 3% but it could take another year before it is back at the 2% target.

Nagel appeared especially worried about underlying price growth, which reflects broader price pressures in the economy, including wages and the crucial services sector.

“Inflation rates – especially the ‘hard core’ – will still remain markedly higher than 2% in the coming months,” Nagel said.

The period of rapid decline in inflation was now over and setbacks were also possible, Nagel said, partly due to statistical effects, including the timing of holidays such as Easter, which impact how businesses price products and services.

(Reporting by Balazs Koranyi; Editing by Alex Richardson)