Central Bank of Ireland governor Gabriel Makhlouf has said he is “increasingly confident” that the European Central Bank (ECB) will hit its 2 per cent inflation target next year.
However, he warned that stubbornly high price growth in the services sector and strong wage growth still posed a risk to that projection.
Euro-area inflation has fallen faster than many had expected since hitting double-digit territory in late 2022 and most economists see it back at the ECB’s 2 per cent level in the first half of next year despite a choppy end to 2024.
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“Recent data make me increasingly confident of reaching our 2 per cent inflation target during 2025, but the stickiness of services inflation and elevated wage growth leave some room for caution,” Mr Makhlouf told an annual gathering of the UK Society of Professional Economists in London on Monday.
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Noting that services inflation still averaged about 4 per cent this year in the euro area while goods inflation was under 1 per cent, he said he wanted to see services inflation closer to 3 per cent to “be more in line with our target”.
“In support of this, there are some signs of labour market loosening, which will help to ease upward wage pressures. Forward-looking surveys and wage trackers also point to a slowing of wage growth next year,” he said.
Mr Makhlouf said last week that Frankfurt policymakers would need to see “overwhelming” data to make a big interest-rate cut in December.
Markets are, however, already pricing in another rate cut next month, the fourth since June, and more cuts next year as headline inflation eases quicker than expected.
In his address, Mr Makhlouf said economic activity across the single currency bloc had, in recent months, been volatile.
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“Third quarter GDP [gross domestic product] was towards the top end of the range in our September projections. Against this, the November PMI [purchasing managers’ index] was weak, along with data on new orders,” he said.
“Weaker growth is a downside risk to inflation, and we will know more after the updated Eurosystem staff projections in December,” said the Irish central bank governor.
“It is clear that policy remains restrictive and, shocks aside, rates are on a downward trajectory. Given the volatility and the data and the substantial uncertainty regarding economic policy in trade partners, I remain open-minded on [the] slope of this downward trajectory,” he said.
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