ECB hawks push back against bets on more and bigger cuts

By Balazs Koranyi

WASHINGTON (Reuters) -Three European Central Bank officials tried to cool market speculation on bigger interest rate cuts on Thursday, urging the ECB to proceed gradually or at least keep its options open.

The ECB has cut interest rates three times already this year and investors are speculating on bigger and faster cuts ahead, encouraged by weak economic data and comments by some policymakers in recent days.

But central bank governors of Slovenia, Germany and Latvia struck a more cautious tone on Thursday.

We should keep going to neutral in measured steps,” Slovenian governor Bostjan Vasle told Reuters on the sidelines of International Monetary Fund and World Bank fall meetings in Washington.

Economists define the neutral rate as one that neither restricts nor spurs economic growth and see this in the euro area at between 2% and 2.5%, although estimates are as high as 3% and as low as 1.75%.

The ECB’s deposit rate is at 3.25% at present.

“There is no urgency in discussing undershooting the target or going below the neutral rate. These are not current issues,” Vasle added.

Portuguese central bank governor Mario Centeno had argued that a 50-basis-point cut – twice the size as the ECB’s last three – could be on the table in December and rates could eventually fall to a level that starts stimulating growth once again.

He was echoed on the latter point by Italian governor Fabio Panetta.

BUSINESS ACTIVITY STALLS

Inflation eased below the ECB’s 2% target last month.

While a rebound is seen in the closing months of 2024, some governors say that the bank should be back at target in the early part of 2025, sooner than projected, with undershooting becoming a real risk.

Latvian governor Martins Kazaks acknowledged this possibility but said this was no reason to ditch the ECB’s mantra of taking decision meeting by meeting, rather than providing guidance beforehand as Panetta advocated on Wednesday.

The modus operandi that we have had so far, meeting by meeting, looking at all the data, not just specific data points, is still to be followed,” Kazaks said.

Bundesbank’s President Joachim Nagel weighed in, saying the ECB should not be “hasty” but “cautious”, echoing comments by President Christine Lagarde a day earlier.

Still, a change to the ECB’s pledge to keep rates restrictive appeared on the cards, as exclusively reported by Reuters last week.

By lowering interest rates further, we’ll be at the upper limit of the neutral rate estimates,” Vasle said. “Once we get there, it may be appropriate to align our language on the need to keep rates restrictive.”

Kazaks chimed in by saying rates “should not remain in restrictive territory when we arrive at 2% (inflation) in a sustainable way.

A survey earlier on Thursday showed euro zone business activity stalled again this month, pointing to an economic contraction as demand from both home and abroad fell despite firms barely increasing their prices.

Vasle and Kazaks said a “soft landing” of the economy, whereby growth slows but does not give way to a recession, remained the baseline but conceded risks were growing.

A soft landing with a recovery is still the baseline,” Vasle said. However, recent data indicates materialisation of some risks which might delay expected improvement of growth.”

(Writing by Francesco Canepa in Frankfurt; Editing by Andrea Ricci and Alison Williams)