MNI INTERVIEW: ECB Likely To Cut Too Late -Bofinger

The European Central Bank is likely to be too slow to cut rates as the economy turns down, one of Germany’s leading economists told MNI, adding that lags in monetary policy transmission mean it will take some time for the full effect of the ECB’s “very strong and very abrupt” hiking cycle to be felt.

The ECB has shown an understandable preference to err on the side of high rates, but recent strong declines in measures of credit and GDP growth indicate it has already “at least done enough,” said Peter Bofinger, professor for Monetary Policy and International Economics at the University of Wuerzburg.

“If we don’t see it fully now, that doesn’t mean that it hasn’t worked - and I don’t think this is something the ECB gives enough consideration. Most forecasts see inflation at more-or-less 2%, certainly by 2025,” he said in an interview. “I think they will be late in reducing rates, just as they were late to raise them.” (See MNI INTERVIEW: ECB Should Hold Until At Least Spring - Vujcic)

OVER-EMPHASIS ON CORE

While headline inflation dipped from 4.3% in September to 2.9% in September, according to the most recent Eurostat flash estimate, policymakers have stressed concern about persistently high core inflation, which only moderated from 4.5% to 4.2% over the same period. This emphasis is misplaced, according to Bofinger.

"The question is whether core inflation is really such a good indicator,” he said. “We know it was a lagging indicator on the way up, and with food and energy costs falling it should also be on the way down.”

The key thing is that there seems little risk of a significant reacceleration of inflation, he added.

“When headline inflation comes down it's also easier to get wage increases that are lower, so I’m quite confident that the risk of upside shocks is gradually fading out. Even if we have 3% inflation in 2024 and 2025, I don’t think this would be a problem,” he said, adding that the ECB’s current “data-dependent” stance was also less than perfect.

“This data-dependent approach is a little bit circumscriptive. We don’t have a forward-looking approach, we just react and react,” Bofinger said. (See MNI INTERVIEW: ECB Growth Assumptions Over-Optimistic).

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