FRANKFURT (Reuters) - The European Central Bank may be in a position to cut interest rates before the summer recess, possibly in June, as inflation is on its ways back to the bank's 2% target, Bundesbank President Joachim Nagel said on Friday.
The comments add Nagel to a long list of policymakers seemingly backing a cut in June and suggest the ECB will be the second major central banks after its Swiss counterpart to start unwinding a record string of rate hikes.
"The probability is increasing that we will see the first rate cut before the summer break," Nagel told an MNI webcast.
"If I would put it into probabilities, definitely something in June has a higher probability than in April."
Markets now see 89 basis points of rate cuts, or at least three but possibly four 25 basis-point moves, with the first coming in June or July.
An initial cut, however, does not imply subsequent moves as there will be no automatism in policy easing and the ECB plans to move meeting by meeting as fresh data comes in, Nagel added.
"We have to be vigilant, we have to be cautious," Nagel added.
Part of the caution is that wage growth remains robust, raising the risk that household income growth could keep prices under pressure.
"We still have strong wage increases in Q1," Nagel said about Germany. "We still observe quite high pay demands by unions."
Workers lost a large chunk of their real incomes to rapid inflation over the past two years so the ECB has long argued they are entitled to a catch up.
The risk is that demands fail to moderate once this catch up process is completed and inflation is perpetuated, especially because unemployment is pinned at record lows and labour unions enjoy a strong bargaining position.
This uncertainty is why the ECB should still wait a few more months before dialling back rates and why it should not make longer-term commitments to an interest rate path, Nagel added.