The European Central Bank (ECB) should have no qualms about changing its stance on interest rates relative to that of the US Federal Reserve (Fed).
THE Giannis Stournaras speaking in Frankfurt after the clearest message given so far by ECB that it will begin to unwind its unprecedented string of rate hikes in June, its governor Bank of Greece reiterated that four cuts are possible this year – despite investors reducing bets on such moves globally.
“Now is the time to diverge,” Stournaras told Bloomberg. “The situations in the euro area and in USA they are completely different. In the US, demand is much stronger – mainly due to the boost coming from the budget. We don’t have anything like this in Europe. And inflation in the euro area is mostly supply-side driven – not demand-side, not wage-driven.”
The remarks come after the US inflation announcement beat expectations and prompted a rapid readjustment in bets on monetary easing. Markets now estimate that the euro zone, where the latest consumer price data missed estimates, will see three rate cuts in 2024, compared with fewer than two for the Fed.
Commenting after the ECB’s decision on Thursday (12.4.2024), President Christine Lagarde confirmed that she and her colleagues are not taking their cue from the other side of the Atlantic. He conceded, however, that there are “multiple channels through which influence can be exerted” – not just exchange rate dynamics, as the exchange rate debate grows louder.
“We are not dependent on the Fed,” Lagarde told reporters. “The United States is a very large market, a very important economy, a major financial center, so all of that finds its way into our forecast.”
Speaking on Bloomberg TV on Friday, former ECB chief Jean-Claude Trichet highlighted the differences between the economic environment in the US and Europe. “The goal is the same, the current situation is not the same,” he said. “You are on two ships that are not in the same place, even if they are going to the same port.”
For Stournaras, the economic struggles of the region’s 20 countries make the case for looser policies more compelling. While he still envisions a so-called soft landing, he warns that waiting too long to cut interest rates will jeopardize already anemic growth and risk inflation falling below the 2% target.
“We are seeing the first seeds of a recovery in Europe – and in Germany,” Stournaras said. “We don’t want to kill those early seeds of recovery.”
It is pushing for successive rate cuts in June and July, followed by two more before the end of the year – a view not shared by all 26 members of the Governing Council.
Some of his more hawkish colleagues prefer a more cautious approach, worried that inflation could pick up as wages rise. They would prefer moves every three months – when the ECB updates its quarterly forecasts.
According to newsit, with Latvia’s central bank governor Martins Kazaks saying on Friday that a June cut is highly likely, the debate over what happens next will play out in the coming weeks. Meanwhile, Stournaras wants the ECB – which has been accused of moving too slowly as inflation soared – to start acting.
“Last September we increased the raises as a hedge against very high inflation,” he said, expressing confidence that pay growth would continue to moderate. “Now the situation has turned in the opposite direction. There is a risk that inflation will fall well below the 2% target. We need a safety net now so we don’t fall behind the curve.”
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