ECB accounts show worries about stalling disinflation

Some European Central Bank policymakers felt uneasy about recent inflation developments when they cut interest rates last month and feared that any further delay in reaching the target would be costly, the accounts of their June 5-6 meeting showed today.

The ECB cut interest rates at that meeting and signalled that more easing is likely to come but kept open the timing of subsequent moves, leaving investors to guess whether one or two more cuts may be appropriate this year.

Policymakers have made clear in recent weeks that no change is coming at the ECB’s July 18 meeting given stubbornly high services costs, but September remains a possibility.

“Some members felt that the data available since the last meeting had not increased their confidence that inflation would converge to the 2% target by 2025,” the accounts said.

“Therefore, any further delay in bringing inflation back to target could make it more difficult to continue to anchor inflation expectations in the future,” some members agreed.

“All of this suggested that the last mile, as the final phase of disinflation, was the most difficult,” they added.

Investors now see about 43 basis points of rate cuts over the rest of this year and about 110 basis points of moves – or between four and five cuts – by the end of 2025.

That would put the 3.75% deposit rate near the 2% to 2.5% range considered by many to be a “neutral” policy stance.

The key worry is that inflation remains too choppy for the ECB to be sure it will fall to 2% by late 2025, as now projected. Wage growth is still high and labour market shortages are exacerbating fears of persistent income pressures.

That could in turn perpetuate domestic inflation and pin overall price growth above the ECB’s 2% target.

But multi-year wage deals already struck by unions are bolstering expectations that pay increases are on a downward slope, moving from the 5-6% range closer to the 3% the ECB considers consistent with its inflation target.