Published : 5 months ago, on 06/05/2024

ECB grows more confident about cutting rates, policymakers say

By Balazs Koranyi and Francesco Canepa

VILNIUS/FRANKFURT (Reuters) -The European Central Bank is growing more confident about cutting interest rates as euro zone inflation continues to ease, three ECB policymakers said on Monday.

ECB policymakers Philip Lane, Gediminas Simkus and Boris Vujcic said separately that the latest inflation and growth data cemented their belief that inflation will head back to the central bank’s 2% target by the middle of next year.

Euro zone inflation stood at 2.4% in April and a crucial indicator of underlying price pressures slowed while the economy staged a small rebound.

“Both the April flash estimate for euro area inflation and the first quarter GDP number that came out improve my confidence that inflation should return to target in a timely manner,” ECB Chief Economist Lane told Spanish newspaper El Confidencial.

Simkus, Lithuania’s central bank governor, was more outspoken, saying he continued to expect the ECB to reduce rates three times by the end of 2024.

“My thinking is that there are some other interest rate cuts coming in the future, but I will restrict myself from elaborating on how many, even if I have already expressed that this year, I would expect three cuts,” Simkus told reporters in Vilnius.

The ECB has all but promised a rate cut on June 6 and money markets are almost fully pricing in three cuts this year, with traders boosting their bets after some dovish rhetoric by the Federal Reserve and weak U.S. jobs data late last week.

This would take the rate that the ECB pays on bank deposits from a record 4% to 3.25%, a level that most policymakers would still describe as restrictive — or curbing economic activity.

“The incoming data so far are quite consistent with our projections,” Croatian governor Boris Vujcic said at the Vilnius event. “If the projections stand, as we see it at the moment, I would expect the loosening of the policy stance, but still staying in the restrictive territory to make sure inflation is brought down to the 2% level.”

While the ECB insists it is not dependent on the Fed, a widening interest rate gap between the world’s biggest central banks would weaken the euro and boost European inflation, likely limiting the ECB’s appetite for going it alone.

Lane said that April inflation data finally showed progress on services prices but the bank would continue to focus on services to make sure it did not derail disinflation later on.

The ECB expects it to fluctuate around this level for most of this year, before falling again in 2025.

(Reporting by Balazs Koranyi and Francesco Canepa; Editing by Alexander Smith)