The European Central Bank (ECB) is set to announce its first interest rate cut next week, potentially marking the beginning of a rate-cutting cycle. Although smaller economies like Sweden and Switzerland have already made cuts, it is expected that the US Federal Reserve will follow suit later in the fall. ECB’s chief economist Philip Lane has indicated that the conditions are conducive for a reduction in the deposit rate, signaling a slight easing of monetary policy.
In an interview with the Financial Times, Lane did not provide specific details on the path of future interest rate cuts but mentioned that monetary policy will remain tight throughout 2024. Despite this impending interest rate cut, monetary policy in the euro area will remain relatively tight as the deposit rate at 3.75 percent is higher than the current 2.4 percent consumer price increase. Economists anticipate two or three interest rate cuts from the ECB this year, potentially lowering the deposit rate to around 3.25 or 3.5 percent by December.
Lane’s decision to adjust interest rates depends on inflation rates and the neutral interest rate. He suggested that a balanced interest rate in the euro area could be slightly above two percent in the long run, indicating room for further cuts. Additionally, Lane highlighted that wage increases are closely monitored by the central bank, and their pace will influence interest rates cuts’ path. The ECB’s decision will be influenced by an upcoming inflation announcement scheduled for Thursday.
Despite anticipation of interest rate cuts, Lane addressed concerns about potential exchange rate consequences and assured recent developments have not weakened the euro significantly. Ultimately, next week’s decision by ECB will depend on various factors such as inflation rates, wage growth, and external economic conditions.
