European Central Bank policymakers aligned in favor of an interest rate cut scheduled for June 6 during discussions on Wednesday, despite challenges from rising oil prices and a depreciating euro. However, their consensus thinned regarding the monetary policy trajectory beyond this initial action.
While the ECB has officially signaled a forthcoming rate cut in June, detailed discussions about future policy steps are scant, influenced by uncertainties over inflation dynamics and potential delays in the U.S. Federal Reserve‘s rate adjustments.
Bundesbank President Joachim Nagel fully supported the June decision but expressed reservations about committing further. “If prices and the economy develop as expected, I would support a cut in key interest rates in June,” Nagel told German magazine Wirtschaftswoche. He also noted, “However, the latest data from the U.S. reminds us that the return of inflation to the target is not a surefire success. It is therefore right that the ECB Council has not committed itself to a rate cut in June.”
ECB board member Piero Cipollone appeared more open to additional rate cuts, pending economic indicators. “If we see that the incoming data, and we’ll receive many data in July and June … will confirm our confidence that inflation is really (moving) to target, it will be appropriate to remove some of the restriction that we put in place,” Cipollone explained at the IIF forum in Washington.
Divergence among ECB officials also surfaced regarding the timing of potential future cuts. While ECB Chief Christine Lagarde and others refrained from discussing plans beyond the June meeting, Greek central bank chief Yannis Stournaras and Lithuania’s Gediminas Simkus suggested that further cuts could be considered as soon as July.
ECB board member Isabel Schnabel urged caution, emphasizing the uncertainty of inflation forecasts. “In an alternative scenario, productivity growth would remain depressed over the projection horizon and demand for less interest-rate sensitive services could remain sufficiently strong,” she said at an event in Washington. “Overall, in this scenario, underlying price pressures could be stickier and the return of inflation to the 2% target delayed.”
Market expectations have cooled, with forecasts now predicting three ECB rate cuts this year in June, September, and December, down from previous expectations of four to five cuts.
Both Cipollone and Nagel highlighted the volatility of commodity prices as a significant risk factor, especially pertinent given the euro zone’s heavy reliance on energy imports. Nonetheless, Cipollone reiterated the ECB’s forecast that inflation might stabilize around 2.4% before gradually decreasing to the 2% target by 2025. He also noted a potential reversal in the recent productivity downturn once the economic recovery takes hold, pointing out that the initial phase of growth might not accompany an increase in employment.
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