(Bloomberg) -- The European Central Bank will probably be able to lower its deposit rate twice more this year provided price pressures slow in line with expectations, according to Clara Raposo, vice governor of the Bank of Portugal.
Raposo argued that receding inflation expectations should temper wage demand across the 20-nation euro zone, and the pace at which services costs increase should slow as a result.
“Interest rates can fall again this year, possibly more than once, if the inflation trajectory holds,” she said in an interview in Rio de Janeiro, where she’s attending a meeting of Group of Twenty finance chiefs. “We are in restrictive territory and there’s ground to cover. Why should we keep interest rates up when investment is weak and services inflation and wages are bound to slow?”
The region’s economy has struggled to find its feet after a weak winter half. Manufacturing is still mired in a deep slump and private spending — which the ECB hopes will deliver more solid growth — hasn’t yet seen a significant boost.
“Growth in the euro zone isn’t negative and that’s good news in itself,” said Raposo, who regularly attends ECB Governing Council meetings with Governor Mario Centeno.
But with households having already recovered losses in real salaries and disposable income improving, she added, “I don’t see why consumption would increase a lot from here, why people would change their behavior and start saving less. It’s investment that needs to pick up and drive future growth.”
Capital spending took a hit during the pandemic and never returned to growth rates observed before the crisis, with the the ECB’s aggressive tightening campaign further curtailing demand.
Now, the prospect of gradual easing might support a recovery, with a recent ECB survey showing firms more optimistic about the supply of bank loans.
Still, policymakers remain concerned that inflation hasn’t retreated enough. The ECB’s latest projections show the 2% target reached only at the very end of next year, and wages keep surprising with big gains.
That’s reflected in services costs, which are still increasing at an above-4% clip.
“Services inflation is still a concern but overall, I’m very positive about inflation,” said Raposo, despite bumps here and there. “And with the kind of inflation expectations we observe, wage growth will slow. There’s no justification for wages to continue to increase at current rates. When that happens, services inflation should retreat as well.”
Turning to Portugal’s banking system, Raposo argued that further consolidation “isn’t top of mind” given the country’s largest banks present more than 70% of assets.
“Of course, we might see changes in the ownership of banking institutions in the future,” she said. “This could mean further consolidation or entry of new players in the system. The relevant point to make at this stage is that Portuguese banks have proved resilient and performed particularly well in recent years.”
--With assistance from Joao Lima.
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