By Balazs Koranyi
WASHINGTON (Reuters) – The European Central Bank should keep cutting interest rates in “measured” steps and talk of undershooting the inflation target or easing policy into territory that stimulates growth is not warranted for now, ECB policymaker Bostjan Vasle said.
The ECB has cut interest rates three times already this year and investors see a 40% chance that its next move in December will be a half percentage point, twice the size of previous cuts.
Those bets were stoked this week when some policymakers argued that a 50 basis point move could be on the table in December and rates could eventually fall to a level that starts stimulating growth once again.
Vasle, Slovenia’s central bank chief, pushed back, arguing the ECB needs to move step by step given lingering uncertainties over inflation.
“We should keep going to neutral in measured steps,” Vasle told Reuters in an interview on the sidelines of International Monetary Fund and World Bank fall meetings in Washington. “There is no urgency in discussing undershooting the target or going below the neutral rate. These are not current issues.”
Inflation eased below the ECB’s 2% target last month and 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.
Making his case for caution, Vasle warned that inflation was not yet defeated, even if recent data were encouraging.
Inflation in services, the largest component of the consumption basket, remained uncomfortably high, and wage growth, a key condition in taming inflation, remained rapid, even if there were signals that it is moderating.
The next cut in the ECB’s 3.25% deposit rate will take it closer to the so-called neutral rate, where the ECB neither slows nor stimulates growth, and this move could be an occasion for the bank to revise its guidance to keep rates ‘sufficiently restrictive’.
“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.”
Most economists and policymakers put the neutral between 2% and 2.5% but various estimates put the top of the range at 3% and the bottom closer to 1.75%.
In a possible nod to more dovish views on the rate-setting Governing Council, Vasle also noted that economic growth was weak and the long-awaited recovery could be delayed.
“A soft landing with a recovery is still the baseline,” Vasle said. “However, recent data indicates materialization of some risks which might delay expected improvement of growth.”
(Reporting by Balazs Koranyi; Editing by Andrea Ricci)
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