Exclusive: ECB’s Kazāks: No Clear Peak of Wage Growth Seen Yet; Risk of Spillover Into Inflation

13 November 2023

By David Barwick – RIGA (Econostream) – It is not yet clear that euro area wage growth has peaked, and there remains a danger that large increases in worker pay could further fuel inflation, European Central Bank Governing Council member Mārtiņš Kazāks said Wednesday.

In an interview (transcript here) on the margins of the annual conference of Latvijas Banka, which he heads, Kazāks defended policymakers’ desire to wait until well into next year before considering the question of when monetary policy could be eased.

There are lots of parts of the picture that we still need before discussing rate cuts, and one of these parts is wage growth’, he said. ‘There is a real risk of wage growth spilling over into inflation.’

The ECB’s projection that HICP would slow to 2% in the second half of 2025 depended on wages, he reminded. Whilst the weakening of profit margins now being seen would help in this regard, ‘no clear peak of wage growth has been seen yet’, he said.

This was in an environment of high uncertainty and still unconvincing spot inflation data, he said, observing that last month's decline in headline inflation was owed largely to base effects and that core readings remained elevated.

 ‘At the same time, the economy is not in an outright recession and labour markets are relatively strong’, he said. ‘So, there has to be some patience at this stage while we wait to make sure that wage increases don’t spill over.’

‘In due time we will discuss the issues of cutting, but the proper moment for such a discussion depends on the data, and it’s currently still premature to say that we’ve reached the terminal rate or that we’re near cutting’, he added.

It was concerning that the ECB’s latest Consumer Expectations Survey showed median consumer inflation expectations for the next 12 months up from 3.5% in August to 4.0% in September, he said.

Kazāks declined to confirm that economic weakness was much weaker than foreseen, noting that high uncertainty could imply a large forecast error.

‘We see that growth is weak, and yes, it is a tad weaker than expected’, he said. ‘But overall it is still the same story, one of weakness rather than outright recession. So, we are still within approximately the same storyline.’

Interest rates were ‘on hold’, and there was ‘no automaticity about the next move’, which would be ‘whatever the data tell us it needs to be’, he said.

Still, he said, ‘Overall, though, with some caveats, I could share the view that further tightening seems to have become less necessary.’

It was early however to say that a hike and a cut were equally likely next moves, he said. ‘Considering the geopolitical risks, the economic outlook and everything else, it’s too soon’ for this, he said.

That an acceleration of QT did not make it onto the agenda for the Governing Council’s monetary policy meeting in Athens was alright, he indicated.

The PEPP of course is the instrument that is very valuable in terms of the flexibility it gives us’, he said. ‘But in general, the balance sheet story is part of the bigger issue of our operational framework, and the president said that a decision about the framework will be communicated in the spring of next year. Given that, there is still some time to discuss the issue of QT and the PEPP.’

Kazāks denied that the PEPP’s mere existence was behind the low fragmentation seen during the past year. Rather, he said, ‘the PEPP’s flexibility could be one of the elements that has been providing some comfort to the financial markets, so one reason why they have not been very jumpy lately.’

‘But it’s clear that markets have been relatively stable, and market reactions are also very much the story of what happens with specific countries, and of what happens in terms of the U.S. spillovers’, he continued. ‘So, there’s a whole set of variables at work here, and I would not agree with the suggestion that financial markets have been stable only because the PEPP is there in the background.’