The European Central Bank (ECB) is poised to continue reducing borrowing costs, though the timing of these adjustments will be influenced by incoming economic data, according to Gediminas Simkus, a member of the ECB’s Governing Council.
Simkus Advocates for Continued Rate Cuts
“Inflation is slowing, and its current trajectory suggests that further rate cuts are necessary,” Simkus said in an interview with Radio LRT on Friday. “Rates will keep declining, but the speed of the cuts will be data-driven.”
Recent ECB Rate Cut and Policy Outlook
Simkus made his remarks a day after the ECB reduced its deposit rate by 25 basis points, marking the second such cut this year. The Lithuanian central bank chief emphasized that policymakers will need “strategic patience” as they navigate the economic outlook.
Uncertainty Surrounds Future Rate Cuts
However, there are few indications of when the next rate cut might occur. ECB President Christine Lagarde refrained from committing to a specific monetary policy path during Thursday’s meeting, leaving the timing uncertain. Money markets now see the probability of another cut in October at just 20%, down from 40% earlier in the week. Sources familiar with the situation suggest that while the door to further cuts remains open, another move next month is unlikely.
December Seen as a Possible Timeframe for Next Cut
Peter Praet, the ECB’s chief economist until 2019, suggested that December might be a more realistic timeframe for the next rate cut. “But December is still far off, and many things can change before then,” he told Tom Mackenzie on Friday. “The ECB is trying to maintain flexibility.”
Concerns Over Wage Growth and Inflation
Wage growth has been a significant factor for the ECB, with recent data from last week showing that wage increases have slowed in the second quarter. This trend has provided some relief, but Simkus cautioned that uncertainties remain, particularly regarding inflation in the services sector.
Vasle and Rehn Emphasize Caution
Slovenian central bank head Bostjan Vasle echoed these concerns, indicating that further monetary easing is not guaranteed. Finland’s central bank governor, Olli Rehn, supported this view, stressing that the ECB’s decisions will be made on a meeting-by-meeting basis, without any pre-commitment to a specific interest rate path.
Bundesbank President Optimistic on Inflation Outlook
Separately, Bundesbank President Joachim Nagel expressed optimism about the inflation outlook. Speaking to Germany’s Deutschlandfunk radio, Nagel said, “The inflation outlook is positive. We expect to reach our 2% inflation target by the end of next year, based on the current data, which justifies yesterday’s rate cut.”
Conclusion
The ECB’s approach to monetary policy remains cautious and adaptable, reflecting a careful balance between fostering economic growth and managing inflationary pressures. As the central bank continues to monitor economic indicators, its decisions will be guided by ongoing data and evolving economic conditions.
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