Governing Council member Yannis Stournaras has urged the European Central Bank (ECB) not to be hesitant about abandoning its excessively cautious approach to interest rates, even if it differs from the Federal Reserve’s strategy. His comments came after the ECB indicated it was ready to reverse its unparalleled cycle of rate increases starting from June.
His remarks followed the US inflation release that exceeded predictions, causing a swift reassessment of monetary easing anticipations. He was speaking in Frankfurt, where he reasserted that four rate decreases are plausible in the current year, regardless of global investors pulling back on such predictions.
“The economies of the Eurozone and the US are entirely distinct. The demand in the US is robust, primarily fuelled by a nudge from the fiscal aspects. This is absent in Europe, and inflation in the Eurozone is more driven by supply factors rather than demand-based forces or wage-based factors,” said Stournaras.
He emphasised that the differences in the 20-country area’s economy indicate an increasing need for a relaxed monetary policy approach. To avoid jeopardising the tepid growth and allowing inflation to slip under the 2% target, he warned against postponing rate reductions for too long.
Further, ECB president Christine Lagarde declared the ECB is not reliant on the Federal Reserve. She did, however, acknowledge the existence of various channels for influence, beyond just the exchange rate dynamics.
“The US is a significant market, a large economy, and an important financial hub; hence, all these aspects are reflected in our projections,” stated Lagarde.
Despite not all 26 members of the Governing Council agreeing, Stournaras recommends consecutive rate cuts in June and July, and two more by the end of the year.
Several of his more aggressive peers are advocates of a prudent strategy, expressing concern over a potential resurgence of inflation due to salary increases. They are in support of action being taken every three months, which aligns with when the European Central Bank (ECB) presents its quarterly predictions.
Currently, this argument is in its initial phase and is forecasted to evolve in the weeks ahead. Meanwhile, Stournaras urges the ECB, previously criticised for its slow response to a soaring inflation, to commence intervention.
“We increased rates last September as a safeguard measure against exceedingly high inflation,” Stournaras confirmed, positive that wage growth would gradually slow down. “However, the situation has now reversed. The danger is that inflation might dip significantly below the 2 per cent target. Our current requirement is to have a safeguard so as not to lag behind the trends.” – Bloomberg.