In a speech today, ECB Chief Economist Philip Lane noted that the central bank’s baseline projections reflect the market yield curve and anticipate “a set of rate cuts” in 2024 and 2025. He noted that with a clearly restrictive deposit facility rate of 3.75%, ECB could address potential “upside shocks to inflation” by adopting a “slower pace of rate reductions.” Conversely, maintaining a policy rate of 3.75% offers “more protection against downside shocks” compared to staying at 4.0%.

Lane emphasized the high level of uncertainty and the persistent price pressures reflected in domestic inflation, services inflation, and wage growth indicators. These factors necessitate a continued restrictive monetary stance, with decisions being made on a data-dependent, meeting-by-meeting basis.

He reaffirmed ECB’s commitment to ensuring that inflation returns to the 2% medium-term target “in a timely manner” and stressed that policy rates will remain “sufficiently restrictive” for as long as necessary to achieve this goal.

Lane emphasized that ECB is “not pre-committing to a particular rate path” and will continue to assess the appropriate level and duration of restriction at each meeting.

Full speech of ECB’s Lane here.

ECB Governing Council member Francois Villeroy de Galhau highlighted today at a conference that month-to-month inflation data will be volatile due to base effects, particularly related to energy prices.

He cautioned that this “noise” in the data is not very meaningful, and the ECB remains “outlook driven” and will focus more closely on inflation forecasts.

Villeroy expressed confidence that, barring any external shocks, ECB will bring inflation back to its 2% target by next year, achieving this with a “soft rather than a hard landing.”

He reiterated the need for a gradual approach to future rate adjustments and emphasized that ECB has “significant leeway” to cut rates before monetary policy becomes restrictive.

In a joint interview with four European newspapers, ECB President Christine Lagarde dismissed the notion that last week’s quarter-point rate cut would be the start of a series of similar moves. Lagarde made it clear that “interest rates will not necessarily move downward in a straightforward manner.”

“We are not following a pre-determined path,” she explained, noting that “there could be periods where we leave interest rates unchanged.”

When asked if rates could remain unchanged for multiple meetings, Lagarde said, “It’s possible. We need to observe how labor costs evolve and ensure that earnings continue to absorb the recent increases.”

Lagarde emphasized ECB’s ongoing efforts to control inflation, stating, “We are still in tightening territory and will continue as long as necessary to bring inflation back to 2 percent.”

In a speech today, ECB Governing Council member Joachim Nagel stressed the importance of caution in making further interest rate cuts, citing ongoing economic uncertainty and persistent inflation pressures.

Nagel remarked, “I don’t see us on a mountain top from which we will inevitably come down. Rather, I see us on a ridge where we still have to find the right point for a further descent,” indicating the need for a measured approach on monetary policy.

Nagel projected that inflation in Eurozone area would gradually decrease towards the ECB’s target, reaching 2% by the end of 2025, albeit later than previously expected. This suggests a longer path to achieving stable inflation, necessitating careful policy decisions.

Earlier today, fellow Governing Council member Peter Kazimir underscored the ongoing battle against inflation, referring to it as the “inflation beast.” Kazimir emphasized that the upcoming September meeting will be pivotal for determining the necessity of further rate cuts.

ECB Governing Council member Robert Holzmann expressed concerns on Saturday about the risks of further reductions in ECB borrowing costs, particularly regarding their impact on the Euro exchange rate and inflation.

Holzmann warned, “If the original assumption of three rate cuts were to materialize, and the Federal Reserve didn’t respond, it would certainly have an impact on the exchange rate, and with it inflation.”

Holzmann was the lone dissenter against ECB’s rate cut last week but stated that the decision didn’t yet make him concerned about inflation risks.

He explained that ECB officials’ implicit commitment to a rate cut was a significant factor in last week’s decision. “There was a review of the data and a discussion about it with different points of view,” he said. “The council’s opinion was that there was no other way, also because it had been announced that such a decision would be made in June.”

ECB Governing Council member Joachim Nagel stated today that the decision to cut interest rates yesterday was “logical” given the tendency for inflation to decrease. However, he emphasized that inflation remains “stubborn,” particularly in the services sector.

Nagel highlighted that negotiated wages are expected to rise sharply this year and continue strong growth thereafter. He noted, “We on the ECB Governing Council are not driving on autopilot when it comes to interest rate cuts.”

Council member Olli Rehn stated that inflation will continue to decline and interest rate cuts will support economic recovery. Rehn suggested that the possible scale of interest rate cuts over the next few years could range from 1 to 2 percentage points, assuming no new economic shocks occur.

Council member Gediminas Šimkus indicated that more than one rate cut might be necessary this year. He acknowledged that while data shows clear signs of disinflation, the path ahead will be challenging. Vice President Luis de Guindos added that inflation is expected to be around 2% next year but also noted “huge uncertainty in the economy.”

ECB has lowered interest rates by 25 basis points as widely expected. Following the reduction, the main refinancing rate is now 4.25%, the deposit rate is 3.75%, and the marginal lending rate is 4.50%.

In its latest forecasts, the ECB projects economic growth to pick up to 0.9% in 2024, 1.4% in 2025, and 1.6% in 2026.

Inflation is expected to average 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026. Core inflation is forecasted to average 2.8% in 2024, 2.2% in 2025, and 2.0% in 2026.

Notably, both headline and core inflation forecasts have been revised upward for 2024 and 2025.

Full ECB statement here.