MNI INTERVIEW: ECB Likely To Hold In October - Gonzalez-Paramo

MNI (ROME) - The European Central Bank’s main priority remains to bring inflation lower and it is likely to hold rates steady in October despite recent soft economic data and the U.S. Federal Reserve’s 50 basis-point rate cut, former ECB Executive Board member Jose Manuel Gonzalez-Paramo told MNI.

"The ECB remains focused on achieving its 2% inflation target by the second half of 2025 and below 2% by 2026," said Gonzalez-Paramo, who served on the ECB board from 2004 to 2012. He noted that the ECB’s 25bp rate cut in September was aimed at maintaining flexibility, allowing the central bank to either sustain monetary tightening if data underperforms or accelerate easing if necessary.

Gonzalez-Paramo said he does not foresee another rate cut in October unless there is significant new data, particularly on activity and employment. “Don’t exclude anything, but in the absence of major surprises, the baseline is to hold,” he said. (See MNI ECB WATCH: ECB Cuts 25BP, Does Not Commit To Rate Path)

The recent 50bp cut by the Fed does not necessarily signal a need for the ECB to follow suit, he added in an interview, as inflation dynamics differ between the U.S. and Europe. “The U.S. has seen a quicker disinflation process, which is now under control. The Fed’s cut acts as an insurance for a soft landing,” Gonzalez-Paramo said, noting the stability of the exchange rate as evidence.

SERVICES INFLATION

Gonzalez-Paramo expressed caution over persistent inflation in services, which has remained at around 4% for over a year. He does not share the optimism of some at the ECB for a gradual retreat in this measure, and thinks that deeper analysis is required to understand its sluggish decline.

“The slow movement in services inflation is a key factor keeping core inflation about 0.5 percentage points higher than headline inflation,” he said. Diverging economic conditions across eurozone countries, weak manufacturing, and a tourism boom linked to lower productivity might partly explain the phenomenon, he added.

Gonzalez-Paramo stressed the need to improve productivity in the eurozone to support wage growth and boost aggregate demand, particularly as consumption data has underwhelmed. "Only 0.8% of the 2.8% rise in disposable income is being spent, reflecting concerns about confidence and uncertainty," he noted, pointing to geopolitical tensions and political uncertainty in some eurozone countries.

However, he offered a more optimistic outlook for 2025, anticipating that stabilising factors could lead to stronger aggregate demand and economic growth.

IMPROVED FORECASTS

While the ECB’s recent projections provide greater clarity on the economic and inflation outlook, Gonzalez-Paramo said it remains unlikely that the central bank will return to using projections as a strict policy guidance tool due to the changing international environment.

The ECB’s "triple reaction function" now serves as the main guide for policy decisions, he said, referring to its emphasis on the inflation outlook, underlying inflationary dynamics, and the strength of monetary policy transmission. While the ECB’s terminal rate will depend on factors like productivity and potential growth, he suggested that a return to a low-inflation, low-growth environment could place the rate in the 2.25%-2.5% range.

However, he warned that euro area real interest rates may have risen more than expected as a result of post-pandemic economic changes, echoing concerns recently raised by the IMF.