There is currently great uncertainty about inflation in the Eurozone. While some economists are optimistic about inflation, and therefore support a rate cut by the European Central Bank in September, others see this as the most likely – but incorrect – step.

Ingo Mainert, CIO Multi Asset Europe at Allianz Global Investors (AGI), believes that a rate cut by the ECB next month would be „difficult to justify“ given the mandate for price stability. „Even the move in June, in hindsight, seems to have been premature.", he adds.

According to Mainert, the ECB is overly optimistic about wage growth. The central bank expects a decline in wage growth in the coming months, and especially next year. If this assumption proves wrong, inflation could be much more persistent than the ECB currently forecasts. Carsten Brzeski, Chief Economist at ING, also finds the ECB somewhat too relaxed. In his view, high wage demands from unions as compensation for past loss of purchasing power, combined with demographic changes, are likely to keep wage growth high for some time.

Mainert also points to demographic changes, and notes that some Eurozone countries have wage indexation. Past high inflation will automatically lead to significant wage adjustments in certain sectors. „A decline in wage growth is currently difficult to infer“, concludes Mainert. „On the contrary, we are observing a certain rigidity in the rise of wages and services prices – one could speak of a wage-services price spiral.“

Silke Tober views the situation quite differently. „The significantly restrictive interest rate level dampens the economy and especially investment, even though inflation is expected to hit the 2% target already next year from today's perspective“, states Tober, head of Macroeconomic Research and Monetary Policy at the Institute for Macroeconomics and Economic Research (IMK) of the Hans-Böckler Foundation. „Further reducing the level of restriction is all the more important given the deteriorated economic outlook and the high risks to financial market stability.“

Tober regards wage development as unproblematic for the ECB. High wage increases are seen as catch-up effects rather than a result of an overheated labour market. Christian Lips, Chief Economist at Nord/LB, takes a similar view. „The good news is that recent wage agreements are primarily compensation for past inflation rather than driven by high inflation expectations“, he says.

Tober urges the ECB to consider rate cuts, with regard to conditions in the labour market. The economy, particularly in Germany, is weak. A significantly restrictive monetary policy could lead companies to retire older employees early. Given the demographic changes, these employees will be needed once the economy picks up. „The ECB must also consider such effects of restrictive monetary policy“, says Tober.

The economists surveyed also differ on how restrictive the ECB's monetary policy currently is. Tober finds it „clearly restrictive“, estimating the neutral rate to be around 2.25%. With the deposit rate currently at 3.75%, it is 150 basis points above this level. Alexander Krüger, Chief Economist at Hauck Aufhäuser Lampe Privatbank, also deems the monetary policy „clearly restrictive“. According to his calculations, the policy is no longer restrictive at 2.75% or perhaps even at 3%. „If the ECB aims to achieve that point, it will probably be engaged in this process until at least mid-2025, provided it proceeds cautiously“, says Krüger.

In contrast, Brzeski sees the monetary policy as only slightly restrictive, saying „since with the inverted yield curve, we don't have historically high interest levels for long-term rates. In my opinion, long-term rates (10-year Bund) are even below the neutral level.“

However, there is agreement that the ECB's current economic forecast is likely overly optimistic. „There is a significant risk that the ECB's economic forecast was and is too optimistic“, Brzeski argues. „The ECB has long expected that the economy will return to growth very soon. Unfortunately, it regularly has to push this expectation further out.“

Tober also points out significant downward risks to the economy, which is why she advocates for imminent rate cuts by the ECB. Germany especially is unlikely to show strong economic growth in the foreseeable future.

„Germany is the economic brake in the Eurozone“, states Krüger. „Currently, there is no clear reason why the economy should grow consistently and clearly above trend for an extended period.“ He anticipates a downward revision of the ECB's projections. Mainert highlights the weak capacity utilisation in the German industry, which recently stood at 77%, offering little hope for a rapid economic recovery.

„We see no upward economic risks for inflation“, adds Lips. He expects and supports a rate cut in September by 25 basis points.

Even those respondents who are skeptical about easing monetary policy next month believe that the weakening economy will prompt the ECB to take this step. „If the ECB revises down its growth forecast when presenting new projections in September, as we assume, this will be a strong argument for the central bank to cut rates in the same month despite persistent inflation above target“, says Mainert.