What can stop the ECB from cutting interest rates further? There is one fact that can put Lagarde and the others in crisis, stopping the accommodative monetary policy, and it concerns work.
Not just inflation: the ECB is looking at several macro data ahead of its September meeting.
Among them is the eurozone’s labor productivity, which barely improved in the second quarter and once again disappointed the central bank’s expectations. The data is significant and could deal a severe blow to efforts to bring inflation back to 2%.
Specifically, labor productivity per capita fell by 0.4%, according to new data published by the ECB. This follows a 0.5% decline in the first three months of 2024 and compares with a 0.3% decline forecast in the Eurotower’s June projections.
Officials such as President Christine Lagarde have often stressed the importance of the “profits, wages, and productivity nexus” in bringing prices back to the target set. If an adequate improvement does not materialize, sustained interest rate cuts could prove difficult. And the ECB could be faced with the question of what to decide in the coming months.
The ECB’s challenge on labor. Why are rate cuts at risk?
What does labor productivity have to do with the ECB’s 2% inflation target? The equation is easy: a more productive workforce is essential for economic growth, but it is also a key element in keeping inflation at bay. This is because higher productivity translates into higher corporate profits that can absorb wage increases and a lower cost per unit of output.
Conversely, with wages rising in the context of low productivity, companies could find themselves forced to pass on these increases in prices for consumers.
Some analysts say the ECB’s forecast that productivity will rise by about 1% in 2025 and 2026, faster than the 0.6% average in the two decades before the pandemic, is too rosy.
The new data could fuel that growing skepticism and spark a debate about whether monetary policy should be eased further. “With productivity falling further, the risk that inflation could remain elevated for a longer period is clearly increasing,” said Carsten Brzeski, head of macroeconomic research at ING.
For the next policy meeting in September “there is a new problem that is slowly but surely bubbling under the surface: how to sell a rate cut when inflation forecasts have been revised up again,” Brzeski said.
More broadly, with these productivity numbers, the case for a rate cut should be weak eurozone growth rather than easing inflation, according to the expert.
Piet Haines Christiansen, an economist at Danske Bank, called the new data “worrying” and explained why:
The first key release in the ECB’s triangulation shows that productivity growth in the second quarter is worse than staff had expected in June. If wage growth does not slow sufficiently, the ECB may not receive enough comforting news to deliver another rate cut and thus be forced to keep borrowing costs on hold in September
Markets are already fully pricing in two more rate cuts this year and see an 80% chance of a third, despite a surprise rise in eurozone inflation in July to 2.6%.
Original article published on Money.it Italy 2024-08-15 15:38:08. Original title: Questo dato può mettere in crisi la Bce
