The European Central Bank should keep cutting interest rates gradually, its chief economist said on Monday, but its policymakers expressed differing views on how to signal their intent given economic uncertainty.
The ECB cut rates for the second time this year on Thursday but provided little to no guidance on further moves, even as some policymakers privately argued that coming back for another cut in just five weeks was too soon.
Markets now see only a 25% chance of a move on Oct. 17, but pricing could shift after the U.S. Federal Reserve's own policy decision later this week.
"A gradual approach to dialling back restrictiveness will be appropriate if the incoming data are in line with the baseline projection," ECB chief economist Philip Lane said in a speech. "We should retain optionality about the speed of adjustment."
He said the ECB may need to speed up cuts if the economy faltered or disinflation accelerated but the bank would have to slow down in case of surprises going in the other direction.
Peter Kazimir, Slovakia's central bank chief, was however keen on shutting the door on October, arguing that quick cuts were risky and the ECB needed more hard data proving that inflation is indeed coming back to target by the end of 2025.
"We will almost surely need to wait until December for a clearer picture before making our next move," Kazimir, an outspoken conservative, or policy hawk said in a blog post.
"I would require a significant shift, a powerful signal, concerning the outlook to consider backing another cut in October," Kazimir said. "But the fact is that very little new information is in the pipeline."
The key issue is that wage growth remains quick and that is putting pressure on prices in services, a sector where worker pay is the biggest variable in overall costs.
Labour costs rose by an annual 4.7% in the second quarter, a slowdown from 5.0% three months earlier, but that is still well above the 3% rate the ECB considers consistent with its target, Eurostat data showed earlier in the day.
But wages are just catching up after workers lost a big chunk of their purchasing power to rapid inflation, and there will be a big slowdown in labour cost growth next year, ECB Vice President Luis de Guindos said in Madrid.
Like Lane, de Guindos made the case for keeping all options open on interest rates.
The policymakers also pointed to inflation volatility, which may present a communications hurdle.
Price growth will slow sharply in September, possibly to target or even below, but will accelerate again towards the end of the year.
That could make it seem like the inflation target will already have been met by the next policy meeting, but this is part of the "bumpy" nature of inflation and price growth is not likely to be back at 2% on a sustainable basis until late 2025.
