Europe: Gradually reduce interest rates to strengthen risk management
2024-11-27
■ The growth rate of agreed wages in the July-September period, which the ECB is concerned about, hit the highest level since the pandemic
■ The ECB is increasingly concerned about lower-than-expected prices and will continue to cut interest rates based on sluggish demand
The agreed wages of the European Central Bank (ECB), an essential indicator of wage trends, accelerated in July-September (up 5.42% year-on-year), hitting the highest growth rate since the pandemic. However, this result did not significantly increase the possibility of the ECB adjusting its monetary policy. The reasons include the acceleration of agreed wage growth in the July-September period, mainly due to the increase in one-time bonuses, and the fluctuation of the results within the ECB's expectations. The ECB previously expected the high wage growth rate to be maintained in the second half of 2024 while the growth rate would slow down significantly in 2025. Like agreed wages, the primary data source of the wage tracking indicator (undisclosed data) that the ECB attaches importance to, the "Indeed Wage Tracker," has slowed since June, consistent with the ECB's expectations. Regarding price and wage data, as long as the data is in line with the ECB's forecast, the priority of these data in monetary policy decisions is expected to decline relatively until the trend of a significant slowdown in wage growth in 2025 is further confirmed.
Based on the September rate cut, the ECB Governing Council meeting held on October 16-17 accelerated the pace of rate cuts. According to the meeting minutes, although the wage trend was basically in line with expectations, considering that economic activity was lower than expected and price forecasts faced more significant downside risks, it was decided to continue to cut interest rates from the perspective of risk management. In addition, the meeting did not clarify future policy guidance. Still, suppose the economic indicators released after the October meeting show a recovery in economic activity and a reduction in the downside risks to price expectations. In that case, the rate cut may be suspended at the December Governing Council meeting, and the October rate cut may be considered as an alternative to the December rate cut.
The ECB regards PMI as one of the important real-time data reflecting the trend of economic activity. The preliminary value of the eurozone PMI for November (composite index: 48.1) released last weekend showed that business activity was shrinking. New orders in the manufacturing and service sectors continued to decline, indicating that demand for goods and services from eurozone companies was sluggish, further increasing the downside risks to the ECB's price expectations. Although the revised November PMI will be released before the December Governing Council meeting, the possibility of a significant improvement in the shrinking business activity and sluggish demand is low, so the possibility of further rate cuts in December has increased. However, the rate cuts are expected to focus on risk management, and the need for a significant rate cut is low.
■ The ECB is increasingly concerned about lower-than-expected prices and will continue to cut interest rates based on sluggish demand
The agreed wages of the European Central Bank (ECB), an essential indicator of wage trends, accelerated in July-September (up 5.42% year-on-year), hitting the highest growth rate since the pandemic. However, this result did not significantly increase the possibility of the ECB adjusting its monetary policy. The reasons include the acceleration of agreed wage growth in the July-September period, mainly due to the increase in one-time bonuses, and the fluctuation of the results within the ECB's expectations. The ECB previously expected the high wage growth rate to be maintained in the second half of 2024 while the growth rate would slow down significantly in 2025. Like agreed wages, the primary data source of the wage tracking indicator (undisclosed data) that the ECB attaches importance to, the "Indeed Wage Tracker," has slowed since June, consistent with the ECB's expectations. Regarding price and wage data, as long as the data is in line with the ECB's forecast, the priority of these data in monetary policy decisions is expected to decline relatively until the trend of a significant slowdown in wage growth in 2025 is further confirmed.
Based on the September rate cut, the ECB Governing Council meeting held on October 16-17 accelerated the pace of rate cuts. According to the meeting minutes, although the wage trend was basically in line with expectations, considering that economic activity was lower than expected and price forecasts faced more significant downside risks, it was decided to continue to cut interest rates from the perspective of risk management. In addition, the meeting did not clarify future policy guidance. Still, suppose the economic indicators released after the October meeting show a recovery in economic activity and a reduction in the downside risks to price expectations. In that case, the rate cut may be suspended at the December Governing Council meeting, and the October rate cut may be considered as an alternative to the December rate cut.
The ECB regards PMI as one of the important real-time data reflecting the trend of economic activity. The preliminary value of the eurozone PMI for November (composite index: 48.1) released last weekend showed that business activity was shrinking. New orders in the manufacturing and service sectors continued to decline, indicating that demand for goods and services from eurozone companies was sluggish, further increasing the downside risks to the ECB's price expectations. Although the revised November PMI will be released before the December Governing Council meeting, the possibility of a significant improvement in the shrinking business activity and sluggish demand is low, so the possibility of further rate cuts in December has increased. However, the rate cuts are expected to focus on risk management, and the need for a significant rate cut is low.