by Balazs Koranyi

FRANKFURT (Reuters) – It will be at least until spring before the European Central Bank (ECB) reassesses its outlook for monetary policy, amid market expectations for a cut in interest rates in March or April are premature, said Bostjan Vasle, member of the Board of Governors of the Frankfurt institution, on Monday.

The ECB left interest rates unchanged last week and favored a stable policy in the coming months, even as investors pressured it to follow the lead of the US Federal Reserve (Fed) by announcing rate cuts in 2024 in view of the decline in inflationary pressures.

Bostjan Vasle, also governor of the central bank of Slovenia, not only rejects this idea but also argues that current financing conditions may no longer be restrictive enough given the decline in bond yields and expectations of a 150 point drop base rates in 2024.

“Market expectations for interest rate cuts are premature in my view, both in terms of the start of the cuts and the overall (cycle) movements,” he told Reuters .

“Market pricing (of a rate cut) has lowered the level of restrictive conditions and this recent accommodative bias embedded in interest rates is not consistent with the appropriate stance to bring inflation back to the objective (of 2%),” he said.

Bostjan Vasle is considered one of the most conservative members of the ECB’s Governing Council responsible for setting interest rates.

Last week, sources close to the council’s discussions told Reuters that a revision of the ECB’s message before March was unlikely, making it difficult to cut rates before June.

WAIT FOR 1ST QUARTER DATA

Markets currently consider that there is a 50/50 chance that a rate cut will occur in March, while the probability of a cut in April is estimated at 100%. They also anticipate at least two rate cuts between now and June.

According to Bostjan Vasle, the ECB may have to wait until the first quarter before considering a review of its current position.

“We will receive little new data before the January meeting, so it will not be until March or April that we will get more information on inflation, growth, fiscal policy and the labor market,” he said. he declared.

“We will need to better understand the underlying trends and we will also need the new projections,” he continued.

Even if inflation in the euro zone recently fell to 2.4% over one year, some ECB officials believe that it could rise again before falling to 2% by the second half of 2025.

“Inflation could start to rise again at the start of the year, then oscillate in a range of 2.5% to 3% during the first half of next year,” said Bostjan Vasle. “It is therefore appropriate to wait and observe the price growth during this period and reassess our outlook,” he argued.

Wage growth is also uncertain, because employees, who have lost a large part of their real income in a context of high inflation in recent years, are demanding increases.

The labor market, however, escapes the expected forecasts compared to historical norms in this area since it remains tense despite the unprecedented monetary tightening of the ECB in the euro zone.

“Most of the wage formation will take place in the first quarter and we need to see whether employees demand additional compensation or whether companies absorb part of the wage growth through margins,” said Bostjan Vasle .

(Reporting Balazs Koranyi; Claude Chendjou, editing by Kate Entringer)

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