European Central Bank set to cut rates for the first time since 2019
How has the recent data on the harmonized index of consumer prices (HICP) and negotiated wage growth influenced the ECB's decision-making?
The recent data on the harmonized index of consumer prices (HICP) and negotiated wage growth has had a notable impact on the European Central Bank's (ECB) decision-making process. Euro area inflation for May came in slightly higher than expected, with headline inflation at 2.6% and core inflation at 2.9%. Furthermore, negotiated wage growth, a figure closely watched by the ECB, reaccelerated in the first quarter to 4.7% after hitting 4.5% in the fourth quarter of 2023.
However, some economists argue that these data points may be distorted by one-off effects. For example, a mild winter boosted outdoor construction and real GDP in the first quarter, while one-off payments raised wages more than usual in some countries, such as Germany, earlier this year.
Despite the higher-than-expected inflation and wage growth data, the ECB is still expected to cut borrowing costs for the euro area for the first time since September 2019. This decision is supported by the belief that some elements of inflation, particularly domestic inflation and services, are proving persistent. However, ECB board member Isabel Schnabel has cautioned against cutting interest rates too quickly, emphasizing the importance of avoiding such actions.
Overall, while the recent HICP and wage growth data have influenced the ECB's decision-making, the central bank is taking a cautious approach, considering potential distortions and focusing on long-term implications for the euro area economy.
What specific reasons did the European Central Bank cite for deciding to cut borrowing costs in June for the first time since September 2019?
The European Central Bank (ECB) decided to cut borrowing costs in June for the first time since September 2019 due to several reasons. One reason was the need to address inflation, which was higher than expected, with headline inflation at 2.6% and core inflation at 2.9%. Another reason was the reacceleration of negotiated wage growth in the first quarter to 4.7%. The ECB also believed that some of the inflation data were distorted by one-off effects, such as a mild winter boosting outdoor construction and real GDP, and one-off payments raising wages more than usual in some countries like Germany. Additionally, the ECB aimed to avoid cutting interest rates too quickly and preferred a cautious approach to ensure stability in the financial markets.
What are some of the one-off effects mentioned by Holger Schmieding that might have distorted economic data like GDP and wage growth?
Holger Schmieding, the chief economist of Berenberg, mentioned some one-off effects that might have distorted economic data like GDP and wage growth. For example, a mild winter could have boosted outdoor construction activities and, as a result, increased real GDP in the first quarter. Additionally, one-off payments raised wages more than usual in some countries such as Germany early this year. These one-off effects can impact the interpretation of economic data and should be taken into consideration when analyzing the overall economic situation.