The European Central Bank (ECB) has given a clear signal that it will cut interest rates from their historic highs next week, with its chief economist dismissing concerns that a cut before the US Federal Reserve (Fed) could backfire.
The ECB, which has been criticised for being one of the last to raise interest rates, is now almost certain to be one of the first major central banks to cut.
“Barring any major surprises, what we are seeing now is enough to remove the top layer of constraint,” chief economist Philip Lane told the Financial Times (FT) in an interview ahead of the bank’s key meeting on 6 June.
Investors are betting that the ECB will cut its benchmark deposit rate by a quarter of a percentage point from a record 4 per cent at next week’s meeting, after eurozone inflation moved closer to the bank’s 2 per cent target.
The Swiss, Swedish, Czech and Hungarian central banks have already cut borrowing costs this year in response to falling inflation. But the Fed and the Bank of England are not expected to cut rates before the summer, and the Bank of Japan is more likely to keep raising rates.
“Central bankers aspire to be boring and I hope central bankers aspire to have as little ego as possible,” Lane said when asked if he was proud that the ECB was able to cut rates earlier than others.
He added that an important reason why inflation had fallen faster in the eurozone than in the US was that the region had been hit harder by the energy shock caused by the war in Ukraine.
“Dealing with the war and the energy problem has been costly for Europe. But this first step [of starting to cut interest rates] is a sign that monetary policy is allowing inflation to come down in a timely manner. In that sense, I think we have been successful,” he said.
Lane said ECB policymakers will need to keep interest rates in the restrictive zone this year to ensure inflation continues to fall and does not rise above the bank’s target, warning that this “would be very problematic and probably quite painful to unwind”.
However, he said the pace at which the central bank would cut eurozone borrowing costs this year would be determined by assessing data to decide “whether it is appropriate or safe to move downwards within the range of restrictions”.
Lane, who is responsible for preparing and presenting the proposed rate decision before it is voted on by the 26 members of the Governing Council next week, said: “It will be bumpy and gradual. The best way to frame this year’s discussion is that we still need to be restrictive throughout the year. But we can move down a little bit within the range of restrictiveness,” Mr Lane said.
