Yahoo Finance It’s Time for the ECB to Diverge From Fed, Stournaras Says
(Bloomberg) -- The European Central Bank shouldn’t be afraid to shift its “overly prudent” stance on interest rates away from that of the Federal Reserve, according to Governing Council member Yannis Stournaras.
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Speaking in Frankfurt after the ECB gave the clearest signal yet that it will begin unwinding its unprecedented bout of rate hikes in June, the Greek official reiterated that four cuts are possible this year — despite investors scaling back wagers on such moves globally.
“Now it’s time to diverge,” Stournaras told Bloomberg. “The situations in the euro area and the US are completely different. In the US, demand is much stronger — mostly stemming from a push coming from the budget. We don’t have that in Europe. And inflation in the euro area was mostly supply-side led — not demand-side led, not led by wages.”
The remarks come on the heels of a US inflation release that overshot expectations and triggered a rapid repricing of bets on monetary easing. Markets now reckon the euro zone, where the most recent consumer-price data fell short of estimates, will see three rate cuts in 2024, compared with fewer than two for the Fed.
Commenting after Thursday’s ECB decision, President Christine Lagarde reaffirmed that she and her colleagues don’t take their cue from across the Atlantic. She did, though, concede that there are “multiple channels through which influence can be exercised” — not just exchange-rate dynamics as talk of parity grows louder.
“We are not Fed-dependent,” Lagarde told reporters. “The United States is a very large market, a very sizable economy, a major financial center as well so all that finds its way into our projection.”
Talking Friday to Bloomberg Television, former ECB chief Jean-Claude Trichet highlighted the differences between the economic backdrops in the US and Europe.
“The target is the same, the present situation is not the same,” he said. “You are in two ships that are not in the same position, even if they go to the same harbor.”
For Stournaras, the struggles of the region’s 20-nation economy make the case for looser policy more urgent. While he still envisages a so-called soft landing, he cautions that waiting too long to lower rates would imperil already anemic growth and risk inflation dipping below the 2% goal.
“We see the first seeds of a recovery in Europe — also in Germany,” Stournaras said. “We don’t want to kill these first seeds of recovery.”
He’s pushing for back-to-back rate reductions in June and July, followed by another two by year-end — a view that’s not shared by all 26 members of the Governing Council.
Some of his more hawkish colleagues favor a more cautious approach, worried that inflation could bounce back as wages jump. They’d prefer moves every three months — when the ECB updates its quarterly projections.
With Latvian central bank Governor Martins Kazaks and his Estonian counterpart Madis Muller both saying Friday that June’s cut is likely, the debate over what happens next will play out over the coming weeks. In the meantime, Stournaras wants the ECB — which was accused of moving too slowly as inflation surged — to start acting.
“Last September we hiked as insurance against too high inflation,” he said, expressing confidence that pay growth will continue to moderate. “Now it has turned the other way. There is risk that inflation will fall too far below the 2% target. We now need an insurance in order not to get behind the curve.”
--With assistance from Aaron Eglitis, Guy Johnson, Anna Edwards and Kriti Gupta.
(Updates with ECB’s Muller in penultimate paragraph.)
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