The European Central Bank executive board member Piero Cipollone said the central bank may be able to lower interest rates 'swiftly' as the wage increases will be able to catch up with two years of elevated inflation.

“If incoming data confirm the scenario foreseen in the March projections, we should stand ready to swiftly dial back our restrictive monetary policy stance.”

(March 27): The European Central Bank (ECB) may be able to lower interest rates “swiftly” even as workers receive large wage increases to catch up with two years of elevated inflation, according to executive board member Piero Cipollone.

A recovery in salaries is needed for Europe’s struggling economy to regain some momentum, the Italian official said on Wednesday, stressing that pay rises should moderate with time. Inflation, meanwhile, is retreating, meaning the point at which monetary settings can be loosened is nearing, he said.

“An excessive focus on short-term wage developments may not take into full consideration the recovery in wages that can — and needs to — take place for the euro area’s currently fragile recovery to gain a stronger footing,” Cipollone said in a speech in Brussels.

“If incoming data confirm the scenario foreseen in the March projections, we should stand ready to swiftly dial back our restrictive monetary policy stance,” he said.

The remarks are Cipollone’s most explicit on rates since his appointment to the ECB in November and cement his status as one of its leading dovish voices. While officials in Frankfurt are largely in agreement about starting rate cuts at June’s meeting, there appears to be less harmony on how quickly borrowing costs should fall as uncertainty over inflation remains elevated.

The process of easing rates should proceed “step by step”, with its effect on the struggling eurozone economy to be monitored closely, Latvian central bank governor Martins Kazaks said earlier in the day.

“Uncertainty is high and here we need to be very cautious,” he said. “We don’t want inflation to revive, but at the moment it looks like this dragon is pinned to the ground.”

Thursday also brought the first data on consumer-price growth for March from a major European economy as Spain reported an uptick to 3.2%. The acceleration was down to government support for energy costs being rolled back, with underlying inflation softening slightly more than anticipated.

For the euro area as a whole, Bloomberg Economics predicts a dip to 2.4% for this month, while a separate nowcast model suggests it could abate to as low as 2.2%, accounting for the latest Spanish data. The reading is due from Eurostat on April 3.

Cipollone said policymakers shouldn’t lose sight of a more than year-long malaise for the 20-nation euro-area economy. Its biggest member, Germany, will barely grow in 2024, according to forecasts published on Thursday by institutes that advise the government in Berlin.

“We should remain proportionate going forward given an economy that has stagnated for 18 months, risks to the economic outlook that are skewed to the downside, and credit conditions that are in restrictive territory,” he said.