On Monday, European Central Bank (ECB) board member Piero Cipollone stated that the ECB does not need to make the euro zone’s economy weaker in order to control inflation. Instead, he emphasized that demand is still weak and signaled a dovish approach to monetary policy. This view aligns with his predecessor Fabio Panetta’s position.
After raising interest rates to record highs last year, the ECB is now considering whether to start cutting borrowing costs due to slowing inflation and a stagnant economy. Cipollone’s comments suggest that a weak economy does not need to be further curbed and that an eventual recovery does not necessarily have to come with higher inflation.
However, other policymakers at the ECB, including Panetta, believe that the moment for rate cuts is approaching quickly. They argue that more evidence is needed before borrowing costs can be cut, particularly concerning wage growth. The prevailing view among the 26 policymakers for the euro area is that this evidence needs to be gathered before any decision can be made about cutting rates.
Chances of a rate cut are uncertain. Investors had previously bet on the ECB starting to cut rates in March but now see only a 50% chance of the first rate cut in April, followed by further reductions throughout the year. These reductions could bring bank deposit rates down from their current level of 4% by as much as 25% by the end of 2023.