The European Central Bank (ECB) is to lower borrowing costs further as the inflation spike of the past few years increasingly moves into the rearview mirror, bringing the 2 percent target within reach, ECB President Christine Lagarde said yesterday.
After a “lengthy period of restrictive policy,” the accuracy of economic projections has improved and officials can concentrate on managing future risks instead of worrying about the transmission of past shocks, she said in a speech, also citing evidence that still-elevated services inflation would ease in the coming months.
“Even though we are not there yet, we are close to achieving our target,” Lagarde said. “If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further.”
Photo: AFP
Inflation has slowed significantly from its peak and even dipped below 2 percent earlier this year. It has since accelerated back above that threshold, with the ECB now expecting some fluctuation before it settles sustainably at the target.
Lagarde said that domestic inflation is still too high, but that price momentum in the services sector has “dropped steeply recently.”
“These data suggest that there is scope for a downward adjustment in services inflation, and thereby domestic inflation, in the coming months,” she said.
An ECB tracker also sees wage growth slowing to about 3 percent next year — “the level we generally consider to be consistent with our target.”
Even after four cuts, the ECB reckons rates are still constricting economic activity at their current level. Most officials say policy can gradually move to a neutral setting that neither restricts nor stimulates growth. That point could be reached as soon as mid-next year, according to bets in money markets.
Officials agree that the eurozone economy is struggling, with households and firms hesitant to spend money amid high uncertainty. The ECB’s latest forecasts see growth accelerating to 1.1 percent next year, while conflicts around the world, the re-election of former US president Donald Trump and political turmoil at home mean it could well turn out weaker.
Meanwhile, the Bank of Japan (BOJ) is set to discuss its rate hike path at this week’s policy meeting, with officials holding the view that there is limited urgency to act even though the next increase in borrowing costs is coming closer.
BOJ officials see little cost to waiting before raising interest rates, people familiar with the matter said earlier this month. While traders now see a less than 20 percent chance of action this time, few are letting their guard down given the BOJ’s history with surprises.
BOJ officials are open to a hike this month depending on data and market developments, and some are not against an increase at this meeting if it is proposed, the people said, reflecting how much they are nearing a third rate hike under BOJ Governor Kazuo Ueda.
“The BOJ is coming closer to a rate hike,” said Izuru Kato, chief economist at Totan Research and a veteran BOJ watcher. “My view is that they will hold in December and raise in January.”
The central bank concludes a two-day gathering on Thursday, several hours after the US Federal Reserve is expected to deliver another 25 basis point cut. Any hawkishness in the Fed outlook, combined with further dovishness from the BOJ, would likely weigh on the Japanese currency.
BOJ officials would make a final decision only after carefully assessing data and financial markets, the people said.
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