Central Bank chief cautions on early rate cuts amid global tensions

Central Bank Governor and European Central Bank (ECB) member Constantinos Herodotou stated that discussions regarding interest rate reductions are premature, given ongoing geopolitical conflicts and potential disruptions in the supply chain arising from tensions in the Red Sea.

In an interview with Econostream, a media outlet specializing in monetary policy, Herodotou acknowledged a decline in inflation following the ECB's monetary policy decisions. However, he emphasized the ECB's commitment to policy based on data, intending to assess whether inflation reduction occurs steadily and sustainably.

"Recognizing significant uncertainty due to continuous economic fluctuations, our decisions are made meeting by meeting, analyzing the latest economic and financial data at the time of each decision. Especially in the current context with two geopolitical conflicts and potential disruptions in the supply chain due to changes in trade routes in the Red Sea, any discussion of possible interest rate cuts would be premature," Herodotou explained.

The first ECB policy meeting for matters related to monetary policy in 2024 is scheduled for January 25.

While noting that inflation is on the right path of deceleration, Herodotou mentioned that more time and progress are required to evaluate and conclude that this path is sufficiently robust and sustainable to bring inflation back to the 2% target.

Responding to a question about the possibility of interest rate cuts earlier in the year, Herodotou referred to ECB forecasts, projecting a decrease in inflation to 2.1% in 2025. He emphasized the need for additional data in the first half of 2024 to make informed decisions.

Asked whether the ECB would wait until the first half of the year before deciding on interest rate cuts, considering the economic weakness in the Eurozone or labor market conditions, Herodotou stressed the ECB's mandate for price stability and reducing inflation to the medium-term target of 2%. He underscored the importance of a comprehensive approach, considering various economic indicators, including wages.

However, he noted that developments in wage dynamics might require closer attention due to the gradual and multi-year nature of wage-setting processes in the Eurozone labor markets. This consideration becomes more critical in light of increased demands from workers to compensate for income losses from the previous year.

According to ECB projections, the Eurozone economy is expected to slow to 0.6% in 2023 and accelerate to 0.8% this year.

Regarding inflation, Herodotou stated that inflation in the Eurozone is expected to rise to 2.9% from 2.4%, primarily due to the base effect in energy prices and the termination of social support measures. He emphasized that the downward trajectory of inflation will continue in the medium term.

Moreover, Herodotou welcomed the ECB's decision to reduce reinvestments under the Pandemic Emergency Purchase Programme (PEPP) until June 2024, terminating it at the end of the year. He believes this decision strikes the right balance between complementing restrictive monetary policy and ensuring the smooth functioning of the market, consequently transmitting monetary policy effectively.

[With information sourced from CNA]