The European Central Bank should proceed with caution after a probable first reduction in interest rates in June, with quarterly data on wages likely to be key in determining further moves, according to Governing Council member Klaas Knot.
“We will have to take a cautious approach after June,” Knot told Japan’s Nikkei newspaper in an interview, saying it’s “too early” to comment on the path beyond that meeting.
“Every quarter, we will have an additional data point on the labour market going into a fresh round of projections, and that will be an important piece of information for us to recalibrate our policy settings,” the hawkish Dutch official said.
While an initial cut at the ECB’s next policy meeting in less than six weeks looks assured, there’s disagreement over what to do next. Worried about Europe’s underperforming economy and the risk of inflation dipping below the 2 per cent target, some urge another move in July. Others, like Knot, warn about uncertainty, particularly over the trajectory for wages.
Knot played down concerns that Middle East tensions will boost energy prices. But he said it’s premature to declare victory over inflation, arguing that there needs to be “quite an ambitious deceleration in unit labour costs” first.
“The experience of the US in the last three months has reminded us that we should still be vigilant,” he said. The ECB is targeting a sustainable convergence toward 2 per cent and “it may well be only in the course of 2025 that this condition can be established”.
