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Finance

ECB policymakers hint at more rate cuts on inflation optimism

Published by Global Banking and Finance Review

Posted on January 31, 2025

Featured image for article about Finance

By Balazs Koranyi

FRANKFURT (Reuters) -European Central Bank policymakers backed further policy easing on Friday just a day after the bank's fourth straight rate cut, despite fresh surveys pointing to continued inflation momentum.

The ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB cut interest rates to 2.75% on Thursday and said that borrowing costs would remain on a downward path as the economy is now stagnating and inflation was "well on track" to reach the bank's 2% target.

Speaking a day after the unanimous decision, Olli Rehn, Finland's central bank chief, said that rates could be heading back to a level that neither slows nor stimulates economic growth.

"We are confident that inflation will stabilize at its target as projected and monetary policy will cease to be restrictive in the near future – I would estimate during the spring or summer," he said in a speech at a central bank event in Helsinki.

Speaking in Davos last week, ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB President Christine Lagarde put this so-called neutral rate at 1.75% to 2.25%, indicating that the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB was two cuts away from the top end of the range.

Policymakers speaking on condition of anonymity told Reuters on Thursday that another rate cut in March remained their baseline.

INFLATION OPTIMISM

Estonian central bank chief Madis Müller also backed the inflation optimism and said that a neutral policy stance was getting closer.

"It is entirely realistic that by the middle of this year, inflation in the euro area will be very close to the 2% target set by the central bank," Müller said in a blog post.

"We are getting closer and closer to a situation where central bank interest rates can no longer be considered high or a hindrance to investments," he added.

Inflation, at 2.4% last month, is seen oscillating near this level for now before heading to 2% around mid-year.

But lower than expected inflation prints from France and Germany on Friday painted a somewhat more benign picture than expected, raising investors' bets for faster rate cuts.

The benign commentary came even as two separate surveys from the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB showed rising inflation expectations.

The bank's quarterly Survey of Professional Forecasters, a key input into policy deliberations, put consumer price growth at 2.1% this year, above the 1.9% seen three months earlier.

The survey's outlook for 2026, however, remained unchanged at 1.9%, suggesting only a small delay in getting inflation down.

The ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB's own projections, released in December, see inflation easing back to the 2% target just after mid-year. For now, price growth could oscillate around December's 2.4% reading, Lagarde said on Thursday.

Meanwhile, the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB's survey of 19,000 euro area consumers showed a similar uptick in expectations last month.

Median expectations for inflation over the next 12 months increased for the third month in a row, to 2.8% from 2.6%.

However, three years out, expectations were unchanged at 2.4%.

(Reporting by Balazs Koranyi; Editing by Toby Chopra and Emelia Sithole-Matarise)