ECB Chief Economist Philip Lane described disinflation process as “necessarily bumpy” at the current phase. In a speech, he pointed out that headline inflation is expected to “fluctuate around current levels in the near term,” influenced by base effects in energy sector and recent reversal of service inflation spikes caused by the early timing of Easter.

Meanwhile, Lane noting that while wage pressures are “gradually moderating,” they remain above what would be considered normal or steady-state levels. He emphasized that achieving ECB’s inflation target involves not just controlling wage growth but also managing profit margins across the economy.

Looking ahead to June Governing Council meeting, Lane indicated that ECB’s decisions would be informed by “updated staff projections” and comprehensive data on wage and profit dynamics from the early months of the year. He suggested that if these updated assessments and data provide stronger confidence that inflation is converging to ECB’s targets, it could be “appropriate to reduce the current level of monetary policy restriction.”

Full speech of ECB Lane here.

ECB Governing Council member Peter Kazimir highlighted emphasized the importance of maintaining a flexible monetary policy stance beyond an initial rate reduction possibly in June. He underscored that the decision to lower rates in June should be viewed as a recalibration in response to improving economic conditions, rather than a firm commitment to continued easing.

“June is an opportunity to recalibrate our approach in light of improving economic conditions. Let’s be clear: We are not pre-committing to a definite path post-June,” Kazimir stated.

He elaborated, “Even after the first rate cut, our monetary policy will remain restrictive; it needs to.”

Kazimir also addressed the broader implications of easing monetary policy, clarifying that “The notion of easing doesn’t imply a commitment to specific future cuts but rather an openness to respond in kind, should the economic data advocate for it.”

Moreover, Kazimir cautioned about the vulnerability of the economy to unexpected shocks, emphasizing the necessity for ECB to maintain its agility in policymaking.

ECB Governing Council member Gediminas Simkus forecasted three 25bps rate cuts for this year, with a potential for a fourth. “I see a higher than 50% chance there will be more than three cuts this year,” he told reporters.

Simkus also highlighted that the ECB might not stop at just one rate cut in June, stating, “I see a higher than zero chance that an interest rate cut may follow also in July. The July decision will be important in setting the trajectory.”

Regarding the pace and magnitude of these rate cuts, Simkus emphasized a cautious approach. He remarked that there is “no urgency to cut rates” by more than 25bps at a time, indicating he preference for gradual adjustments rather than larger, more aggressive cuts.

ECB Governing Council member Francois Villeroy de Galhau indicated an interest rate cut is on the table at the next meeting in June. Onward, there would be more policy loosening this year with a “gradualism” approach.

“Bar a surprise, we should decide on the first cut at our next meeting on June 6. We are indeed growing more and more confident in the disinflation path,” Villeroy said in an interview with Le Journal du Dimanche.

“The interest rate tool has been an effective weapon against inflation. We had to lift that rate to 4% but it is less than in the United States, where it stands at 5.5%,” he added.

Further elaborating on the future direction of ECB policy, Villeroy emphasized a cautious but flexible approach to further rate reductions: “The June rate cut should be followed by more rate cuts by the end of the year; I call for a pragmatic and yet adequately nimble gradualism, based on economic data.”

Moreover, Villeroy made it clear that while ECB is moving away from the high-interest rate environment of recent years, it does not intend to revert to the ultra-low or negative rates that characterized the period from 2015 to 2022.

ECB Governing Council member Yannis Stournaras expressed the need for an “insurance rate cut” to bolster the nascent recovery within Eurozone. Speaking to Bloomberg, Stournaras highlighted the critical balance the ECB aims to maintain in fostering economic growth without stifling it with persistently high interest rates.

Stournaras detailed the emerging signs of economic recovery across the Eurozone, particularly noting positive developments in Germany. “We see the first seeds of a recovery in Europe — also in Germany,” he remarked, emphasizing “We don’t want to kill these first seeds of recovery.”

The concept of an insurance rate cut, as described by Stournaras, is intended to preemptively address potential downturns, mirroring the approach taken last September when rates were increased to guard against surging inflation.

Reflecting on the past year’s policy decisions, Stournaras acknowledged that the situation has reversed, with new risks that “fall too far below the 2% target”. Hence, “We now need an insurance in order not to get behind the curve,” he added.

Moreover, Stournaras argued for a divergence from Fed’s current monetary policy approach, citing fundamental differences between the economic environments in Eurozone and the US. He pointed out that unlike the US, where demand is buoyed by significant governmental budgetary measures, the Eurozone’s inflation dynamics have been primarily driven by supply-side factors, not by demand or wage increases.

ECB maintained its interest rates as widely expected, holding main refinancing rate and deposit rate at 4.50% and 4.00%. Most importantly, for the first time, the central bank explicitly indicated the possibility for future interest rate cuts, which would be seen as a conditional guidance for a June adjustment.

“If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction,” ECB said. Nevertheless, the decision will still be data depended, and meeting-by meeting.

Current observations have “broadly confirmed” ECB’s medium-term inflation outlook, with continued decline in inflation rates primarily driven by decreases in food and goods price inflation. Most measures of underlying inflation are showing signs of easing, and there is a gradual moderation in wage growth. Additionally, firms seem to be accommodating some of the labor cost increases within their profit margins, which is a positive development for inflationary pressures.

Meanwhile, financing conditions remain restrictive and previous interest rate hikes are still impacting demand, contributing to the downward pressure on inflation. Yet, the persistence of strong domestic price pressures, particularly in the services sector, indicates that services price inflation remains elevated.

Full ECB statement here.