ECB likely to dampen hopes of rate cut amid ongoing wage pressures

European Central Bank (ECB) policymakers are expected to keep interest rates unchanged for a third meeting in a row on Thursday, leaving the bank’s main refinancing rate (the rate that affects mortgages) at 4.5 per cent, while signalling the fight against inflation is far from over.

Officials have been dampening expectations of rate cut in the early part of the year despite the progress on inflation, citing wage pressure particularly in the services sector and economic uncertainties related to conflict in the Middle East.

At the World Economic Forum in Davos last week, ECB president Christine Lagarde said it was too soon to “shout victory” on inflation, pushing back on market speculation that Frankfurt might begin a cycle of rate reductions as early as April.

She did, however, signal that a June rate cut was “likely” provided the economic data underscored the move.

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Workers across Europe, including public sector workers in Ireland, are hoping to restore the erosion in real income from two years of high inflation by securing better wage agreements with their employers but this could prove problematic for the ECB as stronger wages tend to drive prices.

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The ECB has cited wages as the single biggest risk factor to getting inflation down to its 2 per cent target rate.

Policymakers expect salary growth across the euro zone of 4.6 per cent this year, ahead of the 3 per cent growth it considers consistent with the 2 per cent inflation target.

While economists expect inflation to continue on a general downward trajectory, the attacks on shipping by Houthi rebels in Red Sea has the potential to reignite inflationary forces.

The disruption has led US and UK forces to attack Houthi installations this week in a bid restore calm to the shipping artery. So far the impact on prices of forcing ships to detour around Africa has been limited.

Ms Lagarde will outline her outlook for prices and interest rates amid a negative approval rating from ECB staff.

[ ECB staff criticise Lagarde’s leadership in union survey ]

According to a survey published this week by the trade union representing the majority of Frankfurt employees, most believe Ms Lagarde is not the right person for the job.

The survey by the International and European Public Services Organisation (IPSO) showed staff trust in the ECB’s entire senior management team was lower than a year ago, with nearly 60 per cent expressing a negative view.

The survey was conducted to coincide with the half-way point in Ms Lagarde’s eight-year term as president. The union said there was a perception among staff that Ms Lagarde was too focused on matters unrelated to monetary policy, and had fostered a negative atmosphere at the euro zone’s central bank.

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