By Francesco Canepa
FRANKFURT (Reuters) – The European Central Bank must see inflation stably below 3% by the middle of next year before beginning to lower borrowing costs from record highs, ECB policymakers Yannis Stournaras told Reuters.
Coming from an outspoken dove, Stournaras’ comment emphasises the ECB’s resolve to stamp out the worst bout of inflation in at least a generation in the 20 countries that share the euro.
It also highlights the disconnect between the ECB and investors, who expect the central bank to start cutting interest rates in April or even March despite pushback from President Christine Lagarde last week.
“We can’t risk it,” Stournaras, the governor of the Bank of Greece, told Reuters in an interview.
“We need to see inflation sustainably below 3% by the middle of the year before cutting rates.”
The ECB kept rates unchanged last week and said it expected inflation to average 2.8% this quarter, 2.9% in the first three months of next year and 2.7% in the second quarter of 2024.
Aside from price growth, Stournaras said “unit labour costs, unit profits and inflation expectations must all point to inflation going back to 2%”.
“We’ll also have to evaluate the overall state of the economy,” he added.
His Slovenian colleague Bostjan Vasle also told Reuters the ECB needed at least until the spring to reassess its outlook for rates and market bets on imminent cuts were premature.
Reuters exclusively reported last week that ECB policymakers did not expect to change their message on the need for high rates before their March meeting, making any reduction before June difficult.
Stournaras was the first ECB policymaker in autumn to openly talk about rate cuts towards the middle of 2024.
Markets were then still speculating on rates staying high for long but they have since sharply reversed on the back of some lower-than-expected inflation readings and a change in rhetoric by the U.S. Federal Reserve.
Money markets are currently pricing in 150 basis points worth of ECB cuts in 2024, bringing the rate the ECB pays on deposits to 2.5%.
(Reporting by Francesco Canepa; Editing by Hugh Lawson)