- 2024-05-04
- News
ECB's Pasaris: Persistent Inflation Risks Require Caution
European Central Bank (ECB) Governing Council member and Governor of the Central Bank of Cyprus, Christodoulos Patsalides, has stated that the ECB has room to further reduce borrowing costs as inflation approaches target levels, but must closely monitor upward risks. He noted that while the economic growth of the 20 eurozone countries is undoubtedly slowing down and may be weaker than the latest forecasts suggest, price pressures are not following suit. Therefore, policymakers should act cautiously to avoid lifting restrictions prematurely.
In an interview during the International Monetary Fund (IMF) annual meeting in Washington, Patsalides said, "If inflation does not rise unexpectedly, then we can and should continue to lower interest rates." "December is an important month when more data will be available, including new forecasts. We will be able to better assess our position."
Less than a week ago, the ECB accelerated its rate cuts, with President Christine Lagarde fueling expectations among economists and traders that the ECB's Governing Council could cut rates again at its next meeting. In an interview on Tuesday, she stated that borrowing costs will obviously fall further, although the pace of the decline is currently unclear.
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Patsalides advocates for gradual measures rather than "drastic cuts" to avoid exacerbating volatility and uncertainty. He said that there is a justification for a 50 basis point move only "in the event of a significant deterioration."
Despite some disappointing surveys indicating a weakening of economic activity, such an outcome is currently unlikely. The ECB still maintains that private spending will rebound as inflation falls back, wages rise, and the labor market stabilizes. Additionally, exports are also on the rise.
He said, "The eurozone economy is slowing down, but it is still heading for a soft landing. However, there are also risks such as geopolitical shocks. The global environment is becoming increasingly dangerous and unpredictable." He added that trade wars are particularly worrying, as they will suppress economic growth and push up inflation, potentially leading to stagflation in the eurozone.
Patsalides stated, "The risks to economic growth are obviously downward, but due to potential supply shocks, oil prices, and trade wars, it is not clear whether the inflation path is tilted in the same direction. Inflation risks are more or less balanced, and we should not ignore the upward risks."
His views differ from those expressed by Lagarde last week. Lagarde also pointed out both upward and downward risks but considered the latter to be "a bit greater."
Other members of the ECB's Governing Council have warned that there is a risk that the ECB will fail to meet its targets again. Finnish Finance Minister Olli Rehn and French Finance Minister François Villeroy de Galhau, among others, have urged finance ministers to pay attention to this situation.
Patsalides said, "I do not believe that the risk of being below target is greater than the risk of exceeding the target; both sides have the same risk." He added that this is why a restrictive stance is still needed now.He stated that if there is absolute certainty that the inflation rate will reach 2% faster than predicted last month, the central bank will reconsider its monetary policy path. However, there is currently no conclusive data to draw this conclusion. The battle against inflation is "not yet won."
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