FRANKFURT (Reuters) -Some European Central Bank policymakers worried at their last meeting that the ECB’s new economic forecasts about wages, growth and inflation were too benign, even before they were published, the ECB said on Thursday.
The ECB said at that meeting that it expected inflation would gradually decline to its 2% target by 2025, wage rises would moderate while economic growth would pick up.
But some of its 26 policymakers expressed doubts about what they called an “immaculate disinflation”, the ECB’s account of the March 15-16 meeting showed.
“Some members argued that there was only a small probability that inflation would fall back to low levels as quickly as suggested in the March ECB staff projections, which gave the impression of an ‘immaculate disinflation’ (i.e. a return of inflation to target with very low cost in terms of lost output),” the ECB said in the account.
It said “a number of members” of the Governing Council saw risks to the inflation outlook “as tilted to the upside over the entire horizon”.
The ECB raised interest rates by 50 basis points at that meeting but it said the outlook was too uncertain to commit to more as a crisis was engulfing one of the world’s largest banks, Credit Suisse.
The ECB’s chief economist, Philip Lane, said this week that financial tensions had since receded, meaning a rate hike was likely at the ECB’s next meeting on May 3-4.
Sources have told Reuters the ECB’s seventh straight hike was likely to be smaller than previous ones at just 25 basis points due to lingering uncertainty about the financial sector and lagged effects from past increases in borrowing costs.
WAGES AND PROFITS
Some of Lane’s colleagues openly challenged the forecasts he presented at the meeting, including one for wage growth to average 5.3% this year before declining to 4.4% next year and 3.6% in 2025.
“There were doubts about whether the projected lower wage growth towards the end of the horizon in the March projections was justified,” the ECB said.
Others argued that it was consistent to revise down nominal wage growth while cutting inflation forecasts.
A decomposition of the driver of core inflation showed that wage growth was becoming the main driver of underlying inflation and lately its contribution had been roughly twice as large as in 2019-20, a time of low inflation and salary moderation.
But policymakers also considered the role of corporate margins in driving inflation, marking a shift in their public communication that had been reported by Reuters ahead of the meeting.
“Members widely reiterated that developments in profits and mark-ups warranted constant monitoring and further analysis on an equal footing with developments in wages,” the ECB said.
“Frequent references to wages in public communication did not imply that there was no consideration of profit margin developments.”
(Reporting By Francesco Canepa and Balazs Koranyi, Editing by Angus MacSwan)
