European Central Bank (ECB) Governing Council member Yannis Stournaras on Thursday, November 21, during a conversation with media representatives, said that this financial regulator should decide on cutting interest rates at each regular meeting on monetary policy issues until the cost of borrowing is fixed at such a mark, which will neither restrict nor stimulate economic activity.
Mr. Stournaras, who is also the Greek central bank chief, separately noted that the mentioned point of view is related to the external background. The constituent elements of the mentioned background are inflation, which develops, and the real economy, which also develops. According to him, the ECB should continue to make decisions on lowering the cost of borrowing until what is called the neutral rate is reached. He also noted that this is an illusive concept but according to the estimates, it’s about 2%.
The ECB began cutting interest rates in June for the first time in five years. Since then, the financial regulator has made several more concerning decisions. Currently, in the eurozone the deposit facility, the main refinancing operations, and the marginal lending facility are 3.25%, 3.4%, and 3.65% respectively.
Yannis Stournaras stated that cutting the deposit rate to 3% next month would be what he says is the right response. At the same time, he noted that there was no answer to the question of whether the possibility of lowering the rate by 50 basis points was excluded.
Yannis Stournaras stated that the ECB still does not have anything on the table. In this context, he noted that the reaction of the markets and the likely actions of the Federal Reserve System are currently unknown.
ECB policymakers are now preparing for the final meeting of the year. According to media reports, the point of view currently dominates among investors and analysts, according to which it is most likely that in December the European financial regulator will decide to cut interest rates by a quarter point. Proponents of this opinion note that the realism of the mentioned ECB action is because the dynamic of inflation in the region showed a slowdown, which turned out to be more significant than preliminary expectations.
Also, according to media reports, many experts are currently predicting a series of decisions by the European financial regulator on cutting interest rates next year. At the same time, there is still no definitive understanding of the likely impact on the ECB’s monetary policy in such a circumstance as the return of Donald Trump, who won the election of the President of the United States, to the White House. In this context, it is worth mentioning Mr. Trump’s intention to slap tariffs on the main trading partners of the US.
Yannis Stournaras said at a symposium in Athens on Monday, November 18, that European economic activity would weaken if the United States imposed tariffs. Also, in the relevant context, he noted that any levies could provoke the implementation of a recession scenario and cause deflation in the medium term.
Greek Prime Minister Kyriakos Mitsotakis warned of the damage which could be caused by a potential trade war between the United States and the European Union. He also said that an accord with the administration of Donald Trump is possible. At the above-mentioned event held in Athens on Monday, Kyriakos Mitsotakis noted that he worries about tariffs, being a proponent of the concept of free trade and holding the opinion that such measures ultimately do not generate a net positive impact. According to him, a potential trade war between the United States and the European Union will not benefit either side of a theoretically possible conflict.
Donald Trump has provoked concern by repeatedly stating his intentions to impose 60% tariffs on goods imported from China and 10% to 20% on products shipped from other countries. It is worth mentioning that during his first term as president, Mr. Trump imposed tariffs on European steel and aluminum exports.
On Wednesday, November 20, during a speech at Birkbeck College in London, Yannis Stournaras said that the eurozone is currently approaching sustained inflation of 2%. According to him, policymakers can already claim success in taming consumer prices. He also noted that policymakers should shift their stance and worry more about the risks to economic growth. According to him, there is currently a possibility that inflation will approach the ECB’s target of 2% earlier than originally expected. He suggests that the mentioned indicator may become a fact of objective economic reality in early 2025. At the same time, initial expectations envisaged that inflation would approach 2% by the fourth quarter of next year. According to him, the ECB policy’s focus may have to increasingly take account of economic conditions to prevent the mentioned goal from being not achieved.
Yannis Stournaras is one of the proponents of pushing deeper monetary easing by the European financial regulator. According to media reports, there is currently a kind of consensus among ECB officials regarding agreement on lowering the cost of borrowing in December. At the same time, there is still no unanimous opinion on the pace and scale of interest rate cuts next year.
Yannis Stournaras said that although there were no signs of a hard landing in the European Union’s economic space, markets are extremely sensitive to disappointing growth figures. According to him, in the case of negative factors in the context of the mentioned growth and the inability to mitigate restrictive monetary policy at an appropriate pace, unnecessary turbulence may be recorded in the market, which will become a factor of negative impact on economic and financial stability.
Yannis Stournaras noted that there is currently a risk of an undershoot of the 2% inflation target and a greater fallout on the economy than currently envisaged. According to him, the September reading of inflation at 1.7% should be considered a success and at the same time a wake-up call. He is convinced that monetary policy, which will remain too tight for a long period, may induce an undershooting of the ECB’s inflation target in the medium term and become an obstacle to economic growth.
According to Yannis Stournaras, the European financial regulator should continue to lower the cost of borrowing in an orderly manner. He also believes that political developments in both the United States and the European Union pose a threat to economic prospects. In this context, Yannis Stournaras stated that the escalation of tensions between the largest economies due to tariffs and retaliatory measures could provoke chaos in the international trade space. He also noted that the implementation of such a situation could become a factor of negative impact on confidence and economic activity at the global level.
Moreover, Yannis Stournaras suggests that the mentioned measures will trigger an acceleration of inflation in the United States. In the eurozone, in his opinion, the situation will remain the same, but at the same time, economic growth will slow down.
Vice President of the ECB Luis de Guindos, during a conversation with media representatives on Wednesday, said that currently, it is crystal clear that the European financial regulator will further cut interest rates. At the same time, according to him, officials in this case should not rush due to the uncertainty associated largely with such circumstances of the current state of affairs in the international arena, such as trade tensions that showing growth, and global conflicts.
Luis de Guindos suggests that the ECB will continue to ease restrictions on its monetary policy over the coming months and quarters. At the same time, in the appropriate context, he noted the importance of the extremely prudent.
ECB warned in its Financial Stability Review that trade is currently an additional threat to the eurozone economy.
Luis de Guindos expressed confidence that the 2% inflation target will be reached next year. He also rejected suggestions that the mentioned goal is unattainable.
Luis de Guindos stated that if inflation on a durable basis converges to 2%, the trajectory of monetary policy is very clear.
It’s worth noting that ECB officials, who adhere to the so-called dovish position, are currently actively calling for a rapid lowering of borrowing costs. In their opinion, an appropriate approach is necessary to support the European economy, which is facing difficulties, and to avoid a drop in inflation below 2%. At the same time, the so-called hawks, who are supporters of a tighter monetary policy, argue that there is no need to rush into actions related to cutting interest rates.
New staff projections in December for economic growth and inflation will be a decisive factor in the context of whether a hawkish or dovish approach will be implemented. It is worth noting that last week the European Commission predicted that the 2% inflation target would be reached only at the end of 2025.
ECB Governing Council member Francois Villeroy de Galhau said at a conference in Tokyo on Thursday that potential trade levies during Donald Trump’s second presidential term would not be an obstacle to the implementation of the European financial regulator’s plans to ease monetary policy. Besides, he said that these measures will not significantly change the outlook for inflation in Europe.
Francois Villeroy de Galhau, who is also the French central bank chief, said that risks to price increases and economic growth are currently shifting to the downside in the eurozone.
ECB Governing Council member Joachim Nagel, who is also the German central bank chief, said in Tokyo on Monday that he sees a threat of further fragmentation of the global economy. According to him, in the context of the implementation of the relevant potential scenario, financial regulators will face new challenges in the form of higher or more volatile inflation.
Joachim Nagel stated that the first signs of geo-economic fragmentation are becoming more and more obvious. He also noted that there is a risk of being on the brink of a significant escalation. According to him, there is currently an alarming dynamic of the situation. In this context, he stated the need to strive for the restoration of cooperation and free trade.
Joachim Nagel said that with a potential escalation of international tensions, inflationary pressures could become stronger. Also, according to him, as part of the implementation of the corresponding scenario, the volatility of consumer price growth will increase. Against the background of such a configuration of economic reality, as Joachim Nagel argues, central banks may face the need to respond by applying such a measure as hiking interest rates. The appropriate actions of financial regulators will obviously cancel out a significant part of their achievements in the context of countering inflation. Joachim Nagel also stated the possibility and intention to do everything necessary to maintain price stability.
The Bundesbank president has repeatedly stated that the re-election of Donald Trump in the presidential election of the US augurs the era of protectionism. He also believes that in this case there is a risk of fragmentation of the global economic order.
Currently, many experts and officials who are representatives of the financial authorities of different countries perceive trade wars as a realistic prospect. The corresponding disturbing vision is related to Donald Trump’s above-mentioned intentions to impose tariffs on imported goods. At the same time, trade wars have not yet become a fact of objective reality and do not belong to the category of inevitable scenarios. It is also worth noting that any reflections on Donald Trump’s actions and the consequences of his decisions for the global economy are currently only assumptions and nothing more.
Francois Villeroy de Galhau in Tokyo once again stated that the ECB should not pre-commit to a particular pace. Also in this context, he separately noted that, in his opinion, the European financial regulator should continue to reduce the degree of monetary policy restrictions. At the same time, Francois Villeroy de Galhau underlined that the pace of appropriate action should be determined by agile pragmatism. He also said ECB officials maintain full optionality for their upcoming meetings.
Moreover, Francois Villeroy de Galhau said that the strong eurozone wage data released on Wednesday coincided with the preliminary expectations of the local financial regulator.
A key gauge of eurozone wages in the third quarter of the current year showed growth, which turned out to be the highest in the last 25 years, since the introduction of the common currency. According to media reports, for the ECB, the corresponding result means complicating the implementation of plans to lower the cost of borrowing as inflation eases.
On Wednesday, the European financial regulator released data according to which in the third quarter of the current year, negotiated pay increased by 5.4% year-on-year. The corresponding indicator rose by 3.5% in the second quarter of 2024.
The media, citing experts, note that the sharp increase in pay may weaken the expectations of analysts and investors regarding the lowering of borrowing costs next year. At the same time, the growth in pay is highly likely not to become an obstacle for the ECB to decide on cutting interest rates in December.
The European financial regulator also predicts a sharp slowdown in the upward dynamic in pay in 2025 and 2026. The ECB claims that the relevant indicators will help to steadily return inflation to the 2% mark.
In Germany, negotiated wages, including ancillary agreements, grew by 8.8% year-on-year in the third quarter of 2024. The Bundesbank stated that the mentioned rates of the upward dynamic of the specified indicator are the fastest since 1993. It is also worth noting that the growth of negotiated wages in Germany has largely contributed to the final pan-European reading.
At the same time, it is possible that the mentioned upward dynamic will not transform into a long-term tendency. It is not excluded that in this case there is a temporary growth that will not become dominant for a long period.
As noted by the media, the European financial regulator does not want the labor market and advances in pay to moderate too much. ECB chief economist Philip Lane said last month that a more robust labor market situation increases the likelihood of achieving the inflation target. Also, according to him, the growth in wages in the coming years will be more consistent than before the coronavirus pandemic.
Francois Villeroy de Galhau stated that the rise in negotiated wages in the third quarter of 2024 is a somewhat backward-looking indicator, mainly due to the belated consequences of past negotiations in Germany. According to him, the relevant circumstance was taken into account in the ECB’s September projections.
ECB Governing Council member and Bank of Italy Governor Fabio Panetta on Tuesday, November 19, during a speech at Milan’s Bocconi University, said that the eurozone economy is returning to charted territory after the shocks of 2022 and 2023. He also noted that inflation forecasting errors are normalizing. In his opinion, the ECB should focus on the sluggishness of the real economy.
Fabio Panetta said that with inflation approaching target and stagnant domestic demand, restrictive monetary conditions are no longer needed. He called on the ECB to provide more guidance on the expected evolution of its policy. According to him, in this case, households and companies will be able to form their views on the future path of policy rates. Fabio Panetta is convinced that the realization of the mentioned opportunity will support demand and the recovery of the real economy. He also suggests that the ECB is still a long way from the neutral rate.
As part of its forecasts, the European financial regulator expects that the pace of economic recovery will be slower relative to those indicators that were envisaged by previous outlooks. Moreover, the ECB warns that further escalation of geopolitical tensions, including those manifested in the form of armed conflicts, could have a significant negative impact on economic growth in the eurozone. Risks such as rising energy prices and imported goods were mentioned in the relevant context. Also, as the ECB notes, the implementation of a negative scenario may provoke a drop in confidence among households and companies based in the eurozone. Moreover, in this case, it was overlined that the mentioned risks could provoke upside threats to the process of disinflation.
The ECB said that rising tensions in the international trade space and the possible further strengthening of protectionist tendencies around the world provoke concern about the potential negative impact on global economic growth, inflation, and asset prices.
The European financial regulator also warned that policy uncertainty, weak fiscal fundamentals in some countries, and sluggish likely economic growth are causing apprehensions about the sustainability of government borrowing.
The ECB also expects that the cost of servicing sovereign debt will continue to increase. In the relevant context, it was noted that maturing debt is rolled over at interest rates that are higher than those on outstanding debt.
It is obvious that at present, in the context of economic forecasts, not only within the eurozone, the geopolitical factor is one of the most significant. The deterioration of the condition of relations between some world capitals creates a clearly unfavorable situation for the system of international cooperation, including in the production plane and trade area. If the situation in the space of geopolitical relationships does not improve, some kind of economic blocs consisting of several countries of the world will likely be formed. Also, in the context of the current world reality, the importance of technological sovereignty is actualized. The deterioration of the situation in the system of international cooperation for many countries in the future means limited or no access to resources for production activities and not only. It is worth noting that the value of technological sovereignty was hinted at in a certain sense by the experience of the coronavirus pandemic when global supply chains were disrupted. At the same time, it is still unknown what kind of configuration of reality will be formed in the geopolitical space in the future. International cooperation will not be interrupted, but it will be fragmented according to the block principle in the case of a negative scenario. It is worth noting that the geopolitical situation in any case will be a factor affecting economic systems and their prospects. In a certain sense, this thesis has universal relevance, including for the eurozone.
As we have reported earlier, ECB Says About Need of New Rules for AI’s Use in Finance.
