“Be careful what you wish for, because it might come true in the end.” The minutes of the September meeting of the European Central Bank can be explained by this famous saying. The central bank is seeing increasing signs that its target is close to being achieved, and it estimates that it will be during the second half of next year that inflation will reach its target, an increase of ‘around 2%. Even if there are still some gaps to fill, such as inflation in the services sector which remains stubborn, the reality is that the euro zone economy is showing stronger signs of weakness than expected by members of the ECB, particularly in consumption and productivity, two fronts which worry them more and more, but which, on the other hand, help them achieve their inflation objective. The hope of central bankers is that everything will stabilize in the coming months, but also They warn that 2022’s interest rate hikes will continue to weigh on the economy for years. The truth test will take place in 2025.
The ECB’s September meeting ended without any major surprises: as expected, the organization lowered interest rates by 25 basis points and updated its macroeconomic forecast table with a reduction of a tenth growth estimates for the eurozone this year and the next two. The publication of the minutes of the meeting details the most important points that were highlighted during the debate between the members of the Governing Council, and leaves several conclusions. The main one is that the ECB is confident of achieving its inflation target next year.a success which is however linked to a deterioration in the bloc’s economy which is increasingly worrying central bankers.
The signs that inflation is on track to meet the target are clear: “Most inflation figures, including those with high future forecast content, are stable at levels consistent with our objective,” explains the document. The only data that continues to worry in this sense is domestic inflation, which is more linked to the services sector, and which Lagarde had already warned a year ago that it had become the last obstacle that had to be moderated to achieve victory. “Domestic inflation remains high due to wage increases” The minutes highlight, but also acknowledge, that “the expected decline in payroll growth next year is expected to be the main contributor to the final phase of disinflation until the target is met,” explains the ECB.
In this way, the organization focuses entirely on domestic inflation data, but it recognizes that the situation can change and does not rule out that in the future the pace of rate cuts may have to be accelerated or delayed, depending on the macroeconomic data that are published, in a context that remains uncertain for central bankers. Of course, the members of the ECB recognize that the current context of the European economy is one of weakness and that the fragility shown by the recovery is greater than they had anticipated, particularly on the front of the consumption and productivity. The scenario managed by the ECB for the coming quarters nevertheless excludes a recession in the euro zone.
The weak economic recovery in the Eurozone is directly linked to high interest rates. The minutes of the September meeting show how closely the ECB is monitoring the impact of the 2022 rate hike on the economy and considers that it continues to hurt growth in the region. Additionally, they warn that it will most likely continue like this for a long time. “Monetary policy continues to affect the economy, and the analysis suggests that “The effects of rising rates may last several years before completely dissipating,” the document says.
The litmus test will be 2025
Even if everything seems aimed at achieving the medium-term inflation target, ECB members do not want to declare victory. In fact, for them, the uncertainty is still so great that they do not exclude that inflation will end up falling well below the 2% objective that the organization maintains; We must not forget that already in September the price increase was 1.8%, although the Governing Council expects that in the last months of the year there will be a rebound temporary of prices due to the base effect.
Looking ahead, if the expectation of a moderation in wage growth comes true, as the ECB forecasts, inflation will reach the ECB’s target in 2025. “Although some shocks are expected in the coming months to come, the photograph shows a continuity of disinflationary pressures in a company. “, the document said, highlighting its expectations that “expected wage growth will be cushioned by corporate profits, as recent data shows.” The ECB’s conclusion is that “it is still too early to declare victory”and they point out that “the litmus test will come in 2025, when it will be clearer whether wage growth has declined, whether productivity has increased as we hope, and whether rising labor costs is sufficiently moderate to keep price pressures contained.
