(Bloomberg) -- The European Central Bank may have to ease monetary policy further to aid the region’s struggling economy, with two more interest-rate cuts still likely this year, according to Governing Council member Yannis Stournaras.
Officials are making progress in their fight against inflation, though flagging economic momentum revealed by recent data will probably reduce price pressures more than anticipated, the Greek central-bank chief told Platow, adding that risks to the inflation outlook are now balanced.
“I still expect two rate cuts this year if disinflation continues as expected,” Stournaras said in the interview published on Thursday. “We are on the right track. Growth is weaker than expected, which also speaks in favor of interest rate cuts.”
Asked whether another reduction would materialize in September, Stournaras only said the decision will depend on data, taking “all available information into account.”
A string of economic reports this week offered mixed signals to policymakers. With Germany unexpectedly back in contraction, second-quarter growth came in slightly weaker than the ECB had forecast in June. Inflation, meanwhile, accelerated last month and a core measure stripping out volatile components held steady.
“Our projections assume that inflation will fall smoothly and quickly — but the path remains bumpy in an environment of great uncertainty,” Stournaras said. “The July reading of 2.6% fits into this picture, and is in line with our projections.”
A Nowcast by Bloomberg Economics sees a slowdown to 2.2% in August. Stournaras said there’s even a risk of price growth falling below 2% in the medium term and that officials should be “equally concerned about overshooting and undershooting the inflation target.”
The services sector has emerged as a key focus amid concerns that strong wage increases will lead to sticky inflation. But Stournaras warned against putting too much emphasis on these factors, saying they “react late to falling inflation.”
“It can therefore be misleading to place too much weight on current data,” he said. “Forward-looking indicators point to a decline in wage growth in 2025.”
He also told Platow:
- “I’m worried that there are no signs of a recovery in manufacturing and industrial production. The increasing geopolitical fragmentation also harbors risks”
- US elections “could have a lasting impact on the global economy”
- On the ECB’s next strategy review:
- “We need to ensure that our strategy is effective in both high and very low inflation. Our inflation target of 2% remains unchanged”
- “There is clear evidence that the neutral interest rate was trending down before the pandemic. I believe that it will be close to, but above, pre-pandemic levels in the future – somewhat above 0% in real terms”
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