In an interview with Corriere della Sera, ECB Chief Economist Philip Lane acknowledged that the December inflation data was “broadly in line with our projections”. He highlighted a “continued progress” in easing of core inflation, yet pointed out existing “headwinds to services inflation.”

A critical point raised by Lane concerns wage growth, which he notes is still rising well above any kind of long-run equilibrium rate”. ECB is expecting “high wage increases” to continue in 2024. “the scale of that will determine the timing and the scale of rate adjustment this year,” he added.

Lane also touched upon ECB’s reliance on data. He mentioned that while new wage data is received weekly, the “most complete dataset” from Eurostat’s national accounts will only be available at the end of April.

This timeline suggests that key policy decisions, especially those pertaining to rate cuts, are likely to be heavily influenced by data available by June meeting.

Finally, Lane’s projection of a “significant recovery” in the European economy this year is tempered with caution, as he acknowledges downside risks to their forecasts. The question of whether 2024 will see a recovery or a continuation of the stagnation experienced in 2023 remains a “big data question” for ECB.

Full interview of ECB Lane here.

ECB Governing Council member Pablo Hernandez de Cos highlighted the surprising strength of monetary policy transmission and cautioned that this could lead to lower growth. Despite the current economic downturn, de Cos emphasized the need for ECB to remain vigilant to avoid the pitfalls of “insufficient tightening” and “unnecessarily harming activity and employment.”

De Cos described the current state of economic activity in Europe as showing “clear weakness,” with expectations of only a gradual increase in dynamism. He also highlighted that “risks to economic growth remain skewed to the downside,” pointing to geopolitical developments as a key factor.

Additionally, de Cos was surprised by the strength of the monetary policy’s impact, saying, “The transmission of monetary policy has been surprising us for its strength, which, if extended in the coming years, would translate into lower growth.”

Looking forward, de Cos emphasized the need for careful monitoring of various developments that could influence inflation and, consequently, ECB’s monetary policy actions. He asserted, “We’ll have to pay attention in the coming months to different developments that may condition the trajectory of inflation and, therefore, our monetary policy action.”

Luis de Guindos, Vice-President of ECB, in speech today, indicated that the “rapid pace of disinflation” observed in 2023 is likely to “slow down” in the coming year, with a “pause” early in the year, mirroring the pattern seen in December 2023.

De Guindos also pointed out that “soft indicators” suggest an economic “contraction” in December, hinting at the likelihood of a “technical recession” in the latter half of 2023. This downturn is expected to have broad impacts across various sectors, with “construction and manufacturing” being particularly hit. “Services” sector is also anticipated to “soften in the coming months as a result of weaker activity in the rest of the economy.”

Regarding the ECB’s monetary policy, de Guindos expressed that the “current level of interest rates,” if maintained, would substantially aid in returning inflation to the ECB’s target. He underscored that the “key ECB interest rates” remain the central instrument for monetary policy, emphasizing that future decisions will be “data-dependent,” focusing on the “appropriate level and duration of restriction.”

Full speech of ECB de Guindos here.

ECB Governing Council member Francois Villeroy de Galhau, in an address to France’s financial sector overnight, stated, “We will cut rates this year when the inflation outlook is solidly anchored at 2% with effective and durable data.”

However, Villeroy did not specify a timeline for these potential rate cuts, emphasizing instead the ECB’s reliance on economic data to guide their decisions. He asserted, “Our decisions will not be guided by a calendar, but by data.”

Villeroy’s statement, “We must demonstrate neither obstinateness nor haste,” further highlights the ECB’s approach as the central bank is keen on avoiding premature actions that could destabilize the disinflation process.