Next rate cut looms – ECB’s Wunsch

The European Central Bank (ECB) is contemplating its next interest rate cut, a decision that is expected to be straightforward, although subsequent reductions will depend on inflation nearing the 2 per cent target, according to ECB policymaker Pierre Wunsch.

The ECB cut rates earlier in June but refrained from committing to further action due to persistent inflation concerns.

Wunsch, who is also Belgium’s central bank governor, emphasised that the initial two rate cuts were relatively easy decisions and maintained this stance despite recent data indicating persistent wage and service price growth.

“If we have no major negative surprises, then based on our forecasts, I would say there is room for a second cut,” Wunsch told Reuters on Monday, adding that minor deviations from projections would not dramatically alter this view.

However, Wunsch indicated that the timing of the second cut was not urgent, suggesting that the ECB might wait for its next forecast update in September. “Waiting for a meeting with new forecasts could be beneficial, but it’s not a strict requirement,” he noted.

Inflation is projected to have slowed to 2.5 per cent in June from 2.6 per cent in May, but the ECB anticipates a “bumpy” path ahead, with inflation figures fluctuating around current levels for the remainder of the year. This could complicate additional rate cuts until a clearer trend towards the 2 per cent target emerges.

Wunsch expressed the need for assurance that inflation is moving closer to 2 per cent before proceeding with further cuts.

The ECB’s deposit rate currently stands at 3.75 per cent, with markets anticipating approximately 40 basis points of cuts over the rest of the year, equating to one or two reductions and potentially four cuts over the next 18 months.

While economic growth is showing a modest recovery and markets remain relatively stable, political uncertainties, such as the recent election success of the far right in France, add complexity. Wunsch warned that several European countries face challenging fiscal adjustments due to excessive spending and emphasised that reducing deficits will not be easy.

Wunsch also downplayed the possibility of the ECB activating an emergency bond purchase scheme in response to political stress, stressing that market moves must be “unwarranted and disorderly” to prompt ECB intervention.

Attribution: Reuters.