Philip Lane, the ECB's chief economist, noted that the central bank may cut interest rates in June, but policy will remain restrictive throughout this year as wage growth is not expected to normalize until 2026.
The ECB has all but confirmed a rate cut for June 6, so attention has turned to its next steps. Markets have adjusted their expectations, predicting another decline in 2024.
Lane mentioned in an interview released on Monday that, barring major surprises, there is enough in their current observations to justify removing the top level of restriction. He stated that the best way to frame the debate this year is to acknowledge the need to be restrictive all year long, but within the zone of restrictiveness, there could be some downward movement.
Although Lane did not make specific statements regarding the July meeting, some politicians, including Isabel Schnabel, conveyed that there should be no rush for a second rate cut.
Wage growth is expected to slow "noticeably" next year, which would allow policymakers to discuss the possibility of normalization.
The ECB's 4% deposit rate is slowing economic growth, and most agree that initial rate cuts to 3% and below will simply remove some restrictions without providing stimulus.
Lane noted that more progress on inflation is needed before moving from maintaining the restrictive phase to considering normalization.
Lane emphasized that the central bank needs to keep rates at a restrictive level this year to ensure inflation falls to target levels, which he said "would be very problematic and probably quite painful to eliminate."
A key measure of wage growth accelerated last week, causing concern among some, but Lane mentioned it was expected and that the slowdown had already begun. He also mentioned that deceleration does not necessarily mean an immediate return to steady state, and noted that the adjustment this year is clearly quite gradual.
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