Statement on the ECB's decision

“As expected, the European Central Bank (ECB) has lowered interest rates by 25 basis points. Despite ECB President Christine Lagarde's uncertainty about a cut this month, markets had already priced in the reduction once inflation rates in the eurozone and its major economies fell below the 2% target. Additionally, indicators of the real economy continue to show a slowdown, which, according to central bank’s view of inflation, should reduce inflationary pressure.

However, this view has significant blind spots. First, inflationary pressure remains. Core inflation, excluding energy and food, is at 2.7%, and service sector inflation is at 3.9%, both well above target. Wage growth also continues to outpace pre-pandemic levels and productivity growth stagnates, potentially keeping domestic inflation high.

Second, the idea that economic slowdown equals lower inflation has proven inadequate in the past, leading central banks to misjudge inflation as transitory. While the ECB claims to be data-dependent, it appears focused on data that fit its traditional model, overlooking the risk of stagflation - a mix of stagnation and inflation.

Finally, monetary supply, often omitted by central banks, keeps rising without corresponding real economic growth. More money chasing fewer goods typically leads to price increases, and lower rates encourage credit growth. In fact, ECB surveys show increased demand for real estate loans and eased financial conditions.

In conclusion, while the ECB maintains a deflationary focus, significant inflationary risks remain. Let’s hope these blind spots don’t lead to an inflation shock down the road.”