ECB’s Cipollone: Holding Rates for Too Long Might Risk Economic Recovery

27 March 2024

By Isabel Teles – BRUSSELS (Econostream) – European Central Bank Executive Board member Piero Cipollone on Wednesday said that waiting too long to reduce interest rates could pose risks to economic growth in the context of already weak activity.

Speaking at an event organised by the House of the Euro and the Centre for European Reform, Cipollone said, ‘If we hold them [interest rates] for too long, we might put the recovery at risk and delay the associated cyclical rebound in productivity growth.’

‘This would be economically costly and induce risks for the sustained convergence of inflation to our target’, he continued.

The ECB ‘should stand ready to swiftly dial back our restrictive monetary policy stance’ if incoming information corroborates the March projections, he said.

In that sense, more data would give the Governing Council ‘additional insurance against upside risks to inflation’ before deciding to start easing, he said, adding however that it was necessary to ‘remain proportionate’ in the context of economic stagnation.

For inflation to converge sustainably to the target, wage growth needed to be moderate in the medium term, he said, warning against the focus on wage developments in the short term.

‘But an excessive focus on short-term wage developments may not take into full consideration the recovery in wages that can – and needs to – take place for the euro area’s currently fragile recovery to gain a stronger footing’, he said. ‘If the economy does not recover, this would mechanically put downward pressure on productivity growth or on employment.’

Answering questions from the audience, he said that the ECB should believe its staff projections on inflation, discuss whether they were materialising and, based on that assessment, adjust the monetary policy stance.

‘Once we are confident that we are on track [with inflation], we should be able to judge meeting by meeting whether we are along that path or not, and be ready to adjust’, he said.