ECB Governing Council member, Pablo Hernandez de Cos, expressed his thoughts on the direction of ECB’s monetary policy during a speech yesterday.

In his remarks, de Cos stated, “We think that we still have some way to go in tightening monetary policy, although we also think that we are closer to the end.” This suggests a continued commitment to ECB’s policy of monetary tightening, albeit with the recognition that this phase might be nearing its completion.

Furthermore, de Cos underscored the necessity of maintaining restrictive interest rates over a substantial duration. The intention behind this strategy, he explained, is to ensure ECB’s objectives are achieved in a consistent manner over time.

ECB Chief Economist Philip Lane has asserted that falling energy prices could lead to lower core inflation due to reduced living costs and, consequently, restrained wage increases. However, he stressed the timeline and extent of this effect remain uncertain.

Speaking at a conference in Dubrovnik, Lane said, “I don’t think it’s symmetric… but when energy prices fall, core inflation does follow, because there is less pressure from an energy cost, there’s less pressure on the cost of living, therefore on nominal wage increases

“So, we do think this spectacular reversal of energy prices will feed into lower core, but the timeline for that and the scale of it is uncertain,” he added.

Lane further observed that wage growth is generally progressing at a moderate pace, with many people still bound to older contracts. “The latest deals are coming in at above 5%, but (this is in the) ballpark of what we expect,” he noted.

Despite this, he expects nominal wage growth to peak this year and suggested it would take real wages until 2025 to recover back to their 2019 level.

ECB Vice President Luis de Guindos told lawmakers in Brussels today, “Our future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to our 2% medium-term target.” Then, interest rates will be “kept at those levels for as long as necessary,” he said.

“Within less than a year we have raised the key interest rate by 375 basis points so far, stopped net purchases of bonds, and will probably stop reinvesting via the APP program from July,” he said. “And the ECB Governing Council will continue on this monetary tightening path to overcome high inflation.”

“As the energy crisis fades, governments should roll back the related support measures promptly and in a concerted manner to avoid driving up medium-term inflationary pressures, which would call for a stronger monetary policy response,” de Guindos added.

Separately, Governing Council member, Bostjan Vasle, said “Further interest-rate increases will be needed.”

“But they’ll be smaller than they were in the past. We’re approaching the level of rates that’s restrictive enough to bring inflation back toward 2%. Fiscal — including wage policy — and monetary policies will have to be linked to a greater extent than in the past,” Vasle noted.