Italy’s Piero Cipollone expressed the view that the European Central Bank should be prepared to quickly adjust its restrictive monetary policy stance in his first speech on monetary policy since joining the ECB’s board in November.
During an event in Brussels on Wednesday (27 March), he made a case for reducing interest rates at the central bank’s upcoming meeting in April.
The percentage of wages in the economy remains lower than pre-pandemic and energy crisis levels, failing to keep up with rising prices. While there has been some improvement in wages, the rate of growth is starting to slow down.
Cipollone warned that if this deceleration continues, workers could face a situation of permanently reduced wages.
Some central bankers are concerned that cutting interest rates too soon could lead to a resurgence of inflation.
In January, Dutch central banker Klaas Knot, known for his hawkish stance on monetary policy, cautioned that wage growth needed to slow down before considering lowering interest rates.
Based on an ECB staff analysis, a 1% increase in wages leads to around a 0.5% rise in core inflation.
However, Cipollone disagreed with this projection, highlighting the uncertainty and time needed for it to fully materialize. He also emphasized the positive aspects of higher wages.
“An excessive focus on short-term wage trends may overlook the necessary recovery in wages for the fragile euro area economy to gain a stronger foundation,” he stated.
Wage growth has lagged behind productivity gains in Europe since the fourth quarter of 2021, and reductions in food and energy prices create room for wage increases without driving overall core inflation, according to Cipollone.
He also mentioned the potential for rebalancing between wages and profits, as companies have been able to raise selling prices, leading to higher profit margins.
Cipollone suggested that more data would offer additional protection against unexpected “upside risks to inflation,” noting that the EU economy has been stagnant for 18 months and inflation has dropped to 2.6%, the lowest level in over two years.
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This situation “strengthens the case for adjusting our policy rates,” according to Cipollone.
“Delaying rate adjustments for too long could jeopardize the recovery and hinder the growth in productivity,” he added.
It remains uncertain whether his proposal will be accepted, as more hawkish central bankers like Knot and conservative Austrian central bank chief Robert Holzmann anticipate no rate cuts before June.
ECB president Christine Lagarde has refrained from committing to a specific path for rate adjustments.
