FRANKFURT, Dec 8 (Reuters) – The European Central Bank has no reason to change interest rates for months and should be mindful of some upside inflation risks, including from slower wage moderation and a smaller impact from the euro’s firming, Slovak policymaker Peter Kazimir said.
The ECB has been holding interest rates steady since cutting them by 2 percentage points in the year to June, debating whether it has done enough to keep inflation at 2% after taming runaway price growth.
“I see no reason to move in the coming months,” Kazimir told Reuters in an interview. “Definitely not in December, then we’ll see.”
He argued that the economy and prices are developing broadly as expected but there have been some upside surprises that require attention.
“The labour market remains tight, growth is a bit better and wage moderation is somewhat slower than we expected,” Kazimir, considered a policy hawk on the 26-member Governing Council, said.
While inflation risks are broadly balanced, he argued that being ‘vigilant’ to upside risks has become more important.
His comments are likely to solidify already ample investor bets that the ECB is done cutting interest rates. Markets now see virtually no chance of any further policy easing even next year after growth and price data both surprised on the upside.
Kazimir’s comments echo a message from ECB board member Isabel Schnabel, who argued that the ECB’s next move is likely to be a hike, rather than a cut, but not anytime soon.
Some have argued that the euro’s strength against the dollar is making imported goods and energy cheaper, fuelling disinflation and raising the risk that euro zone price growth dips below target.
But Kazimir warned that the exchange rate impact may be smaller than some expect and the ECB should in any case not react to inflation bumps caused by energy base effects.
“We continue monitoring the exchange rate pass-through to goods inflation, as it may not be as strong as expected,” Kazimir added. “Firms might not entirely reflect developments in the exchange rate markets in their final prices.”
The euro is up 6% in a year on a trade-weighted basis and it is also 11% stronger against the dollar, the currency used to price key energy commodities.
Still, inflation could dip below 2% next year, even if temporarily, and this is why some policymakers worry about downside risks.
Kazimir, however, pushed back, arguing that the labour market is tight, the output gap is closed, growth is at potential and wage moderation is slow, all reducing the chance of inflation going too low.
“The projected undershooting doesn’t worry me at all,” he said. “There is no need to react to small deviations, especially if they are because of energy.”
“Monetary policy needs to provide certainty and trying to overengineer policy around small bumps in inflation would actually create uncertainty,” he said.
(Reporting by Balazs Koranyi; Editing by Toby Chopra)
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