ECB has room to cut rates but should take its time, policymakers say By Reuters

(Reuters) -The European Central Bank has room to cut interest rates as inflation slows but must take its time in easing policy, even if the direction of travel is already clear, key policymakers said on Monday.

The ECB has all but promised a rate cut for June 6, so the debate has shifted to subsequent moves and the speed at which they come, and markets have dialled back their expectations to bet on just one more cut this year.

“Barring a surprise, the first rate cut in June is a done deal, but afterwards we have several degrees of freedom,” French central bank chief Francois Villeroy de Galhau told Germany’s Boersen Zeitung.

He did not call for a quick follow-up but he gently chided colleagues like board member Isabel Schnabel who are already discussing a pause after the initial step.

“Why so, if we (go) meeting-by-meeting and data-driven?” Villeroy said. “I don’t say that we should commit already on July, but let us keep our freedom on the timing and pace.”

ECB chief economist Philip Lane took a more measured stance but warned that easing too late risked pushing inflation below target, which would then force the ECB to rush with rate cuts.

“Keeping rates overly restrictive for too long could push inflation below target over the medium term,” Lane said in a speech in Dublin. “This would require corrective action through a subsequent acceleration in rate cuts that could even require having to descend to below-neutral levels.”

Markets currently see just one more rate cut this year after the initial move in June, a big reversal compared with the start of the year, when up to six cuts were expected.

Still, Lane insisted that disinflation was on track and even if price growth figures could be choppy in the coming months, trends remained in line with the bank’s projections that put inflation back at the ECB’s 2% target in 2025.

Villeroy said that this could then allow the ECB to ease policy further and that expectations that its deposit rate, now at 4%, could settle at 2%, were not outlandish.

“We have significant room for rate cuts,” he said. “From today’s perspective, my feeling is that present market expectations for our terminal rate are not unreasonable.”

Speaking to the Financial Times, Lane also said that ECB policymakers needed to keep rates in restrictive territory all year and more progress was needed on inflation.

“But within the zone of restrictiveness we can move down somewhat,” he said.

Both Lane and Villeroy agreed that a recent rise in negotiated wage growth was not particularly worrisome and a further deceleration in earnings was expected.

“Deceleration does not necessarily mean an immediate return to steady state,” Lane said. “This year the adjustment is clearly quite gradual.”