ECB Governing Council member bets on two more rate cuts for this year

Unlike some of his colleagues who’d prefer to take decisions on rates at the quarterly meetings that are accompanied by fresh economic projections, Mr Rehn (pictured) sees each policy gathering as an option for further moves since officials have new economic reports to digest for each. File picture: Billy Higgins

Investor expectations for the European Central Bank (ECB) to loosen monetary policy twice more this year — and bring borrowing costs to as low as 2.25% in 2025 — are fair, according to Governing Council member Olli Rehn.

In some of the most explicit remarks from an ECB policymaker on the path for interest rates, the Finnish central bank chief also said that while officials must ensure inflation returns to 2%, they shouldn’t overly dampen economic activity.

“If you look at market data, it implies that there would be two more rate cuts so that we would end up at 3.25% by the end of this year and, with the terminal rate — somewhere around 2.25%, 2.50%,” Mr Rehn said. “In my view, they are reasonable expectations.” 

The ECB began lowering rates this month following an historic spate of hikes to tame the eurozone’s worst-ever inflation. Most officials have since been cagey on what will happen next — mindful of the recent uptick in consumer-price growth, stubbornly high wage gains and geopolitical friction.

Investors reckon there are still 45 basis points of rate cuts to come in 2024 — equating to a second quarter-point move and about a 75% chance of another. The next may arrive as soon as September, and is fully priced by October.

German bonds edged lower across the curve, in line with global peers. The 10-year yield rose three basis points to 2.44%, in line with its recent range.

While underscoring that the ECB won’t pre-commit to any particular path, Rehn made clear that it’s rational to expect further reductions.

He said:

In case we see the disinflationary process continuing and moving toward our symmetric 2% target of the medium term, then it is reasonable to assume that we stay with this direction and continue rate cuts.

Despite recent data overshoots, “we have a disinflationary process going on” and “always knew that it’s going to be a bumpy road,” Mr Rehn said. “We have to see the forest for trees.” 

Speaking on Wednesday at a conference in Helsinki, Mr Rehn repeated that sentiment, adding that the ECB “is determined to ensure that inflation stabilises to the 2% medium-term target in a timely manner.” 

Unlike some of his colleagues who’d prefer to take decisions on rates at the quarterly meetings that are accompanied by fresh economic projections, Mr Rehn sees each policy gathering as an option for further moves since officials have new economic reports to digest for each.

“I don’t think we should restrict ourselves unnecessarily,” he said. “Otherwise we might as well cancel the so-called interim meetings and save fuel and save the planet.” 

Mr Rehn’s Latvian counterpart Martins Kazaks said there’s no need to hurry monetary loosening and officials should act step by step.

“We are easing,” he said in Helsinki. “But of course we will do it in a way that it is data-dependent. Let’s see what happens with the economy. There is, in my view, no need to rush.” 

 - Bloomberg