corporate

ECB set scene for June rate cut at last meeting, account shows

FRANKFURT: Euro zone inflation remains on track to fall back to 2 per cent next year, so European Central Bank policymakers will likely start cutting interest rates from a record high in June, the account of their April meeting showed on Friday.

The ECB left interest rates unchanged last month but made clear that its next move will be a cut, most likely on June 6, provided wage and inflation data stay on their current, relatively benign path.

"It was seen as plausible that the Governing Council would be in a position to start easing monetary policy restriction at the June," the ECB said in the account of the April 10-11 meeting.

Policymakers appeared so confident about the outlook that some even made the case to start easing in April, a suggestion eventually overruled by a wide majority, who argued for patience until more wage and price data came in.

The few dissenters argued, as ECB President Christine Lagarde described last month, that ECB rates will continue to restrict the economy even after an initial cut, so past policy tightening will continue to work through the economy.

Speaking in the weeks since the April meeting, policymakers have confirmed that the June 6 cut is all but a done deal but the rate path beyond that is uncertain, given inflation volatility and a possible delay by the U.S. Federal Reserve to its own rate cuts.

Most, however, argue that June will not be a singular, one-off cut, even if the timing for further moves should not be predetermined in advance, to give policymakers flexibility in the case of abrupt changes in economic conditions.

In another small shift in the bank's message, policymakers now see the cost of undershooting the inflation target on a par with overshooting, a reversal for many who argued that too rapid price growth was the bigger risk.

"The risk of undershooting the inflation target and eventually having to pay too high a price in terms of declining activity was now seen as being at least as high as the risk of acting too early and overshooting the target over the medium term," the ECB added.

Markets now see up to three rate cuts this year, or two beyond June, most likely in September and December, when the ECB also publishes new economic projections.

Euro zone inflation held steady at 2.4 per cent last month and is expected to oscillate around this level for the rest of the year before easing back to the ECB's 2 per cent target in 2025.

Policymakers emphasized throughout the account that incoming data kept confirming the bank's own projections, which was increasing the ECB's confidence in the quality of forecasts after a few bumpy years when these figures were wide of the mark.

While the ECB has publicly declared that policy was not dependent on Fed moves, decisions taken by the world's biggest central bank impact financing conditions around the globe, limiting the ECB's freedom since a widening rate differential weakens the euro and pushes up imported inflation. - Reuters

Most Popular
Related Article
Says Stories