MNI INTERVIEW: ECB May Pause After First Cut - Wieland

Strong domestic price pressures may prevent the European Central Bank from following up a likely June rate cut with a second reduction soon afterwards, though headline inflation may temporarily dip below target, the former chair of the German Council of Economic Experts told MNI.

March’s ECB projections showing inflation averaging 2.0% in 2025 and 1.9% in 2026 have led some ECB Governing Council members to call for a faster pace of easing, and flash estimates on Wednesday showed eurozone prices increasing by only 2.4% last month - down from 2.6% in February - with core inflation falling from 3.3% to 2.9%.

But while declining energy prices mean headline inflation might dip below 2% sooner than projected, Volker Wieland said GDP deflator measures of domestic inflation may remain above target. The deflator is where the price-wage mechanism is most visible, he said, noting that it was increasing at 5.3% in the fourth quarter of 2023 and that ECB staff estimate that it will continue to grow at more than 3%.

“From that perspective, there’s not a big risk of inflation settling below 2%, but having talked a lot about June it's now a pretty likely event that the ECB will ease then. Afterwards, one might question whether it’s really so urgent to ease more soon,” he said in an interview.

MORE CUTS NOT GUARANTEED

“It's not guaranteed that more cuts will follow right away,” he added, “If things develop as the ECB predicts, then—so they say—they would be in a position to ease in June.” (See MNI INTERVIEW: June Cut Not Done Deal - ECB's Holzmann)

Rate market projections for the ECB to cut the deposit rate from 4% now to 2.25% in 2025 “sound a bit low,” Wieland said, though he added that this seemed to be compatible with implied Fed rates.

“It’s not totally outlandish,” he said “But at this moment in time we know very little about where the real interest rate is going to be in the long run. At some point inflation will go back to 2%. At that point, I think it makes sense from a risk management perspective to have a nominal rate slightly above that, perhaps at 3%”

While investors are turning more cautious over the timing and speed of Fed easing, Wieland said there was little to fear from further limited divergence with ECB rates in the coming months.

“There is a big gap now between ECB and Fed interest rates. Last fall, I thought the ECB could have gone above 4% in order to keep that gap smaller. But for now the level of rates seems to be enough to help inflation coming down. It is encouraging to see that domestic inflation is moving in the right direction, although we will have to see where wage settlements and actual wages end up.” (See MNI SOURCES: ECB Wary Of Any "Significant Divergence" With Fed)