MNI INTERVIEW: ECB May Need To Raise Rates Next Year - Kocher

Only a “substantial” deterioration in the growth and inflation outlooks would justify a rate cut in the next few months, the head of the Austrian National Bank told MNI, adding that the European Central Bank should not overreact to projected medium-term inflation undershoots and that a hike may even be necessary next year.

Were a deterioration in the growth outlook and the outlook for inflation to occur in coming weeks a rate cut would be “more likely than now,” Martin Kocher said in an interview, though last week’s slightly better-than-expected data may point in the opposite direction.

“If that momentum continues, there is more of an argument, not now or at the next meeting, but further down the road in 2026, for a rate hike, even.”

While it is “very difficult to think in terms of a cap or a floor for permissible undershooting or overshooting” of the 2% target level, it is important to recognise that there will always be fluctuations that have to be looked through, he said. (See INTERVIEW: Eurozone Risks Tilt To Downside - ECB's Stournaras)

“There is no asymmetric assessment for undershooting or overshooting. We still have two months’ worth of data outstanding before the end of the year, and we are still waiting for the December projections, at which point we’ll see to what extent the slight undershoot that we currently expect for 2026 and 2027 continues into 2028,” he said.

“What I think is more important is whether there will be revisions to the projections for 2026 and 2027. I would put more weight on 2026, and perhaps on 2027, than 2028.”

STABLE DATA

There is an “almost deceptive stability” in both incoming euro area data and projections for growth and inflation, Kocher said, although with the ECB essentially at target “there would have to be substantial developments to argue for a change.”

Any effect of the delayed introduction or watering-down of Europe’s ETS2 carbon emission trading system on inflation over the medium-term is hard to quantify, Kocher said, though inflation risks are currently “pretty balanced.” (See MNI: EC Autumn Inflation Forecast To Assume Mitigated ETS2)

Germany’s massive fiscal programme is likely to have some pro-inflationary effects for the bloc, though the majority of this may not show up much before 2027, he said. Price pressures may also be affected by capacity constraints, the extent to which the funds - particularly those allocated to defence investment - are fully disbursed, and spending outside the EU.

Supply-chain disruptions, trade conflicts and geopolitical risks could also add to upward price pressures, though there is near-to-medium-term disinflationary risk from trade rerouting from China to the EU, Kocher said. “It might also be that growth rates are lower than expected." 

Europe’s high savings rate is likely a product of aging populations, ongoing uncertainty and recent experience of high inflation, and continues to curtail consumption-based economic growth, though that may change as households become more comfortable with higher price levels, Kocher said.

“I personally think that we'll see a reduction that is quite substantial over the next couple of years, unless the uncertainty increases or something happens that would provide a renewed argument for precautionary saving.”

RISKS MORE BALANCED

Kocher agreed with the ECB’s assessment that risks to the growth outlook are “more balanced” than was the case earlier in the year.

“Some would have said the growth outlook was already balanced a couple of weeks ago, in which case ‘more balanced’ would mean, importantly, positive. That’s what I think the phrase is referring to – especially thinking back to the spring, when there were a lot of negative risks to the outlook stemming largely from the first round of U.S. tariffs,” he said. 

“Since then several of these risks have not materialised, or not to the extent we thought they would this year. So in this sense I would completely agree that the outlook is more balanced.”