The European Central Bank (ECB) is considering the possibility of gradually reducing interest rates in response to expected decreases in inflation. Despite having recently made the decision to cut rates for the first time in the current cycle, the ECB has not provided a clear commitment regarding its next move. However, policymakers within the ECB are in agreement that further cuts are on the horizon, with the only uncertainty being the timing of such actions.
Statements by ECB Policymakers
Bank of Italy governor Fabio Panetta and Finnish central bank governor Olli Rehn have both expressed their views on the situation. Panetta emphasized that the current macroeconomic conditions support a normalization of the monetary stance and that the ECB will continue this process gradually. On the other hand, Rehn acknowledged that current market expectations for rate cuts by the end of the year are reasonable, given the projected continued disinflationary process.
While policymakers have hinted that July might not be the most suitable time for the next rate adjustment due to concerns about recent wage and price data, Panetta cautioned against making premature comments. He stressed the importance of making data-driven decisions on a meeting-by-meeting basis. Panetta also addressed concerns about persistent inflation in services, suggesting that this phenomenon is only temporary and that patience may be required to fully address the issue.
The ECB anticipates that inflation will remain above its 2% target for the remainder of the year but expects a downward trend to start next year, with price growth reaching 2% by the end of 2025. Market expectations point towards rate cuts in September and December, which would bring the ECB’s deposit rate down to 3.25% from its peak of 4.0%. The rate was previously cut to 3.75% on June 6.
Analysis by ECB Chief Economist
ECB chief economist Philip Lane later addressed the conference, noting that the recent rate adjustments had been effective in curbing lending, with a robust and potentially stronger impact than previous tightening cycles. Lane’s comments suggest that the ECB’s monetary policy decisions are having the desired effect on the economy.
The ECB is closely monitoring economic indicators and inflation trends to determine the appropriate timing for further interest rate adjustments. Policymakers are committed to making decisions based on data and are prepared to act gradually to address any challenges that may arise in the future.