LONDON (Reuters) – The European Central Bank can gradually reduce interest rates given the decline in inflation, and decisions on future cuts could centre around quarterly meetings with new economic projections, Dutch central bank chief Klaas Knot said on Tuesday.
The ECB has all but committed to a rate cut on June 6 when new economic forecasts will also be published. Policymakers are now debating how quickly it should cut again given that inflation is likely to be volatile in the months ahead, but is still seen falling to 2% in 2025.
Knot, an influential voice on the 26-member Governing Council, suggested that meetings in June, September and December could be key, since much of the most significant data used to justify policy moves are published only once a quarter.
“Policy rates will slowly but gradually move to less restrictive levels,” he said in a speech in London. “Projection round meetings of the Governing Council will be the key meetings for our interest rate decisions.”
A growing list of policymakers, including board member Isabel Schnabel, Belgium’s Pierre Wunsch and Latvia’s Martins Kazakas have made the case for a pause in July, shifting the focus to September after the initial move in June.
Knot argued that March projections suggested that three to four rate cuts could have been appropriate this year, but wage growth remains elevated and productivity growth is weak, so it was not evident that the June 6 projections would point to a similar rate path.
“Based on the March projections, optimal policy would have been broadly in line with 3-4 rate cuts,” Knot said. “The important takeaway is that, although these interest rate scenarios can provide useful guidance, given the current environment we still have to avoid any commitments on a specific future rate path.”
Markets currently anticipate around 60 basis points of rate cuts this year or between two and three moves, including a fully priced in June step.
Knot argued that as disinflation continues and the outlook improves, the ECB will become increasingly confident that price growth is returning to its 2% target.
However, wage increases, a key component in inflation, are still quick and will be bumpy this year, even if recent data on wage agreements shows some moderation compared to 2023.
(Reporting by David Milliken and Harry Robertson; writing by Balazs Koranyi and Sharon Singleton)
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