As the European Central Bank (ECB) gears up for its Thursday meeting, speculation about another rate cut has sparked debate across financial markets. Just five weeks after the last reduction in mid-September, some believe the ECB may once again lower policy rates. However, Commerzbank’s Chief Economist, Dr. Jörg Krämer, is sounding the alarm, arguing that cutting rates now could be a mistake given persistent inflationary pressures.
At the heart of Krämer's concern is the risk that another rate cut could undermine efforts to control inflation. Although core inflation has cooled in recent months, he points out that part of this decline is tied to the drop in energy prices, which had a temporary knock-on effect on other prices, such as transportation services. “This is what we saw last autumn,” Krämer notes, suggesting that the current inflation slowdown may not be sustainable.
Additionally, wage growth remains a significant issue. Eurozone wages have surged to 4.5%, well above the ECB's 2% inflation target. Despite ECB claims that wage growth is moderating, Krämer insists this isn’t the case. “The rise in wages has not yet slowed,” he emphasizes, highlighting that strong wage growth could keep inflationary pressures elevated, making a rate cut premature.
Labor shortages are also a growing concern. Around 20% of companies in the eurozone report difficulties in finding workers, a much higher figure than the historical average. Krämer warns that a rate cut could fuel investment demand, worsening labor shortages and increasing the bargaining power of employees, potentially leading to higher wages and inflation.
The final argument Krämer presents is one of historical caution. He draws a parallel to the 1970s oil price shocks, where central banks cut rates too early, causing inflation to surge again. Today, long-term inflation expectations are not as firmly anchored at 2% as they were before the pandemic. “The ECB should stick to a restrictive policy for longer,” Krämer advises, warning that loosening monetary policy too soon could risk a repeat of past inflationary spirals.
With the ECB’s decision looming, Krämer’s argument against a rate cut introduces a sobering perspective. As markets anticipate Thursday’s announcement, it remains to be seen whether the ECB will heed warnings like Krämer's or proceed with further rate reductions at a time when inflation risks are still in play.
