Luis de Guindos, Vice-President of the European Central Bank (ECB), welcomes the ongoing process of reducing inflation. He anticipates that the ECB will make its first interest rate cut during the upcoming Frankfurt meeting on Thursday, June 6. However, he is concerned about the risk of a financial crisis coming from the US, where persistently high inflation prevents the Federal Reserve (Fed) from cutting rates.
The battle isn't over, but we have notched up several important victories along the road to disinflation. We have gone from 10% headline inflation to 2.4%. Core inflation is also falling and is now below 3%. All the indicators are moving in the right direction. We're not there yet, but the end is in sight. We think we will reach our 2% target in 2025.
Looking beyond geopolitical risks, the largest remaining threat stems from inflation in the services sector, mainly driven by wages. But here, too, there is a clear slowdown in the dynamics: wages were increasing at a rate above 5% a couple of quarters ago but were growing at just over 4% in the last quarter of 2023.
Wages need to rise to make up for lost purchasing power, but this catch-up process has to go hand in hand with an improvement in productivity. However, this is not happening, whether we're talking about productivity per employee or per hour worked. As a result, unit labor costs are still increasing. But I think we're going in the right direction and will see some gains in productivity.
We have been very clear: if things move in the same direction as they have in recent weeks, we will loosen our restrictive monetary policy stance in June. Assuming there are no surprises between now and then, as you say in French, it's a "fait accompli".
That will depend on how the data evolve, on the geopolitical situation and the potential impact on oil prices, for example. We will also need to monitor wage and productivity developments. And we will need to take into account what's happening in the United States, where inflation is higher. The level of uncertainty makes it very difficult to say. I already mentioned June. As for what happens afterward, I'm inclined to be very cautious.
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