MNI INTERVIEW: ECB Mindful Of US Rates - Bank of Greece Deputy

The European Central Bank will be mindful of any divergence between its own and Federal Reserve interest rates, given the implications for the euro exchange rate and financial markets, Bank of Greece Deputy Governor Theodore Pelagidis told MNI.

“A difference is that a euro interest rate move might have less impact on the dollar’s interest rate, while a primary dollar interest rate move is expected to have a more significant impact on the euro’s interest rates, growth and inflation, mainly through the exchange rate and financial markets channels,” Pelagidis said in emailed responses to questions. “In other words, sensitivity is different."

The ECB is widely expected to lower rates for the first time in cycle in June, with investors also betting on a June cut to U.S. rates. However, what happens next after June is less clear, as Europe struggles with low growth while the U.S. economy continues to expand. (see MNI INTERVIEW: German Jobs To Go As ECB Delays - Ex-Wise Man)

“Rate cuts are of course decided independently, even more so as economic activity grows currently at a such different paces in the US and Euro area," Pelagidis said. "However, some interest rate interaction is inevitable as the two currency areas cannot be decoupled. (see MNI SOURCES: ECB Wary Of Any "Significant Divergence" With Fed)

CYCLE OUTLOOK

How low ECB rates will ultimately go is uncertain, he said. (See MNI SOURCES: ECB Cut Expectations Range From 50-100BP In 2024)

"Euro´s neutral interest rate seems now around 2.5+/3%. But still difficult to tell as how inflation behaves at lower interest rate levels remains a puzzle,” Pelagadis said.

“Inflation currently shows some persistence. Labour markets are still tight. Food and energy demand will continue to push for price spikes in the long term, and service inflation has moved higher due to a combination of still strong demand and job vacancies.”

There are also longer-term trends which suggest the shift to a higher natural rate of inflation may be a permanent one, Pelagidis said, potentially implying a shallow path of Fed rate cuts.

“In our less globalised, i.e. less efficient world, a number of critical resources have become more precious, more in-demand and expensive. The global population keeps increasing, as does size of the the middle class in Asia, India and - forthcoming - in some states in Africa. Climate change is also contributing to the era of higher prices for certain commodities.”