ECB comfortable with rates; sees only temporary inflation undershoot, VP says

FRANKFURT (Reuters) -The European Central Bank is comfortable with the current level of interest rates and considers any inflation dip below 2% to be temporary, Luis de Guindos, the bank's Vice President said on Thursday.

Inflation, hovering just above the ECB's 2% target for most of this year, is projected to dip below that level next year and some policymakers fear this could shift inflation expectations, entrenching ultra-low levels, much like in the pre-pandemic decade.

"If (undershooting) happens, it will be something that is going to be temporary," de Guindos told a Natixis CIB webinar. "We can be comfortable with the present level interest rates," he said.

"I think that convergence to 2% without any overshooting or undershooting is now the main baseline scenario for projections," de Guindos added.

Financial investors mostly agree but still price in a modest chance of further policy easing to prevent inflation from slipping too far from its target. While the chance of a rate cut in December is seen as close to zero, investors still see a 40% chance of a cut by mid-2026.

De Guindos said that recent inflation news has been positive and the slowdown in services price growth, a stubbornly high component of the price basket, also increased the ECB's confidence in projections.

Another component of the ECB's comfort in the inflation path comes from solid growth readings in recent weeks. While figures are not spectacular, they indicate that the 20-nation bloc continues to expand at a rate of 1% or just above, broadly in line with its potential.

De Guindos said that policymakers were now "marginally" more optimistic on growth and saw the bloc on track to meet the ECB's forecasts.

(Reporting by Balazs Koranyi; Editing by Alex Richardson and Tomasz Janowski)