Inflation going down but “clarity needed” say central bankers

 In Central Bank, ECB, FED, Interest rates, News

European and US central bankers were reserved over hopes that inflation on both sides of the Atlantic was significantly coming down.

Members of the European Central Bank (ECB) and the US Federal Reserve (FED) have been gathered for the annual European Forum on Central Banking held at the Penha Longa Resort in Sintra since Monday (1 July).

The bankers were cautiously optimistic that the process of disinflation was making progress, but underscored that “more clarity” from the market was needed.

The annual three-day conference, which ends this afternoon, was held against the backdrop of the European Central Bank’s decision to cut interest rates in the eurozone for the first time in almost five years.

The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility was cut to 4.25%, 4.50% and 3.75% respectively from 12 June.

Federal Reserve (Fed) Chairman Jerome Powell in his keynote speech highlighted the positive aspects of the economy and disinflationary measures.

He said that the labour market was still strong and that the downward inflationary trend showed signs of resuming. “The labour market is still strong, we’ve made quite a bit of progress on inflation, but we need to be more confident before reducing policy rates.”

Jerome Powell stressed that more data on inflation like the figures seen recently was required before taking any decisions to cut interest rates further.

“We need to see more data like we’ve been seeing recently. If the labour market unexpectedly weakens, that would cause us to react”, he said, adding “we have the ability to take our time and get this right.”

In terms of cutting interest rates and relaxing tight monetary policy Powell said that they were well aware of the “risk of cutting too soon or too late” but that the risks were becoming more balanced.

He pointed out that wage increases were moving back down to more sustainable levels and that the labour market was cooling off.

The President of the ECB, Christine Lagarde agreed that the European and US economies were on a “very advanced disinflationary path” and that “inflation was headed in the right direction.”

She said that the latest data from Eurostat indicated a slowdown in the rate of inflation in the eurozone to 2.5% for June which was positive, but warned that the road in the coming months would be “bumpy”.

On labour and salaries, the ECB president said that although disinflation was going in the right direction, the ECB would need to see how the services market behaved and if profits would offset salary increases.

Services registered a higher annual rate in June of 4.1% (equal to May), and according to Lagarde could not just be caused by the ‘Taylor Swift’ effect which had seen room rates in hotels soar in recent weeks in Europe’s cities, including Lisbon, on the back of high demand because of the US singer’s European tour.

Moreover, data for June has not been “clear enough” on services according to the ECB Chief Economist Philipe Lane, adding that it was to early to provide a timeline for slashing rates.

The Vice-President of the ECB, Luís de Guindos told CNBC that the central bank did not have a pre-determined trajectory for interest in the eurozone and that given continued uncertainties, decisions would be taken on a meeting-by-meeting basis.