„Wages are the last domino that still needs to fall for the ECB“
Mr Veit, inflation in the eurozone has risen recently, but mainly due to temporary statistical base effects. How optimistic are you that the ECB will achieve its inflation target in the long term this year?
I quite agree with the ECB's current inflation forecast. If wage growth slows down to around 3% as expected, then nothing really stands in the way of the central bank's inflation target. Wages are the last domino that still needs to fall for the ECB.
What about Donald Trump? The new US President could increase inflationary pressure with his economic policies – including in the eurozone.
It is very difficult to say what measures Trump will implement. Accordingly, it is difficult to predict the exact impact of his policies. A negative effect on economic growth is likely for the eurozone. In terms of inflation, the upside and downside risks are roughly balanced. For the US, however, higher inflation is more likely, while the risks to growth are symmetrical.
The ECB will not tolerate missing its inflation target this year.
Konstantin Veit, Portfolio Manager at Pimco
The ECB is expected to cut key interest rates by 25 basis points at the end of January. How much do you expect the deposit rate to fall this year?
I think the next two interest rate cuts of 25 basis points each will be quite easy for the ECB. At 2.5%, the deposit rate will then be at a level where the central bank will have to take a closer look at whether monetary policy is still restrictive or whether this is no longer the case. There is one thing we should not forget. The central bank's current projections are pricing in the fact that the ECB will not reach its inflation target on a sustainable basis until the fourth quarter. Not much is missing and it will be postponed to the first quarter of 2026, but the ECB will not tolerate missing its inflation target this year. It is therefore likely to act cautiously when easing monetary policy. This means there could well be a pause in interest rates this year if new forecasts question the achievement of the inflation target for 2025.
So an ECB rate cut of 50 basis points sometime this year, as speculated by some investors, is not an issue?
That would require a greater inflation-dampening effect from the economic policy of the USA. Otherwise, the ECB is likely to stick to its gradual easing approach.
What is the greater risk for the ECB, too low or too high inflation in the medium term?
Both are roughly equally likely.
We see some signs that the labour market is weakening
Konstantin Veit, Portfolio Manager at Pimco
A decline in wage growth is crucial for the ECB. Why are you confident that this will materialise? Wages have recently risen sharply.
Although the unemployment rate in the eurozone remains low, we see some signs that the labour market is weakening. This can be seen in the number of job vacancies, the purchasing managers' indices and the wage demands of the trade unions. The trade unions are currently shifting their focus from high wage demands to more moderate increases in combination with guarantees for job security. VW is a good example of this.
The economy in the eurozone is only recovering slowly. This is also due to the fact that private consumption is not picking up, even though the ECB has been predicting this will happen for a long time. Why are consumers remaining frugal despite real wage increases?
We don't have a climate in the eurozone that is overly conducive to consumption or investment. I don't expect that to change any time soon. The geopolitical tensions remain. We also have difficult domestic political conditions in some eurozone countries, including the two largest economies, Germany and France.
New elections are due to be held in Germany in a month's time. Do you expect the new government to provide a positive impetus for the economy?
Unfortunately, I'm not very optimistic. Germany always wants to be world champion in two things: football and exports. However, the latter means that the German economy is far too dependent on foreign demand. The new federal government should therefore ensure that domestic demand and the service sector are structurally strengthened, and that the economic structure as a whole is better diversified. However, I don't see any political party that seems to have recognised this. Therefore, I do not see a major economic upturn in Germany in sight.
Former German Finance Minister Christian Lindner recently suggested that the ECB should also hold Bitcoins as a reserve. What do you think of this idea?
Basically, there is no fundamental data that determines the value of Bitcoin, as there is for shares, bonds or gold. There is only scarcity. It is therefore unlikely that Bitcoins fulfil the criteria for central bank reserves in the eyes of the ECB.
