In a speech today, ECB Executive Board member Isabel Schnabel noted the role of “persistently low, and recently even negative, productivity growth” in exacerbating the inflationary pressures from the current strong growth in nominal wages.

She pointed out that this scenario increases the likelihood of firms passing higher wage costs onto consumers, thus “delaying inflation returning to our 2% target.”

With the backdrop of a prolonged period of high inflation, Schnabel argued for the necessity of maintaining restrictive monetary policy stance until there is clear confidence that inflation will sustainably return to ECB’s medium-term objective.

She warned against premature policy adjustments, suggesting that to avoid a “stop-and-go policy” reminiscent of the 1970s, a cautious approach is essential.

“We must be cautious not to adjust our policy stance prematurely,” she said.

Full speech of ECB Schnabel here.

In an interview, ECB Governing Council member Edward Scicluna pointed to March economic projections as a crucial factor that could justify a shift in policy, opening the door for rate cuts. “March could be it,” he suggested, “We’ll see how many think that there’s no need to wait for June.”

Acknowledging the “bumpy” path toward achieving ECB’s disinflation objectives, Scicluna emphasized the clear trend of declining inflation. “You should see the writing on the wall and admit objectively that the trend is going down,” he stated.

Despite the possibility of justifying a hold on rate cuts due to various concerns, including geopolitical tensions, Scicluna argued for a more direct approach: “You have to make a judgment; you don’t find these excuses.”

“Let’s face reality — of course, risks are flying all around us,” he said. “But when you get a comprehensive look at things, prices are falling.”

“At a time when demand is falling, I believe you can let off the pedal a bit,” Scicluna said.

In a European Parliament committee hearing, ECB President Christine Lagarde highlighted that the “ongoing disinflation process” is expected to continue “gradually further down over 2024,” attributing this trend to the diminishing effects of past upward shocks and the impact of tighter financing conditions on inflation.

Lagarde noted a “gradual decline” in core inflation, which excludes energy and food prices, while also pointing out the “signs of persistence” in services inflation.

Significantly, Lagarde identified wage growth as a crucial factor, stating it is becoming an “increasingly important driver of inflation dynamics.” ECB’s wage tracker signals sustained wage pressures, although there’s “some levelling off” observed in the latest quarter of 2023. The direction of wage pressures in 2024 largely depends on “ongoing or upcoming negotiation rounds” affecting a broad segment of the workforce.

Furthermore, Lagarde observed that the influence of unit profits on domestic price pressures is on the decline, suggesting that wage increments are being partly accommodated through “profit margins.”

Full remarks of ECB Lagarde here.