(Bloomberg) -- An increasingly dire euro-area economy might exacerbate slowing consumer-price growth, according to European Central Bank Governing Council member Olli Rehn.
“Disinflation in the euro area is well on track,” the Finnish central-bank chief said Tuesday in Washington. “The growth outlook has weakened quite clearly in the past few months, which could also increase disinflationary pressures,” he said, adding that “we have to be mindful of — possibly also concerned about — the posibility of inflation undershooting.”
Still, “for the moment I am not yet at least so concerned about that because services inflation and wage inflation are clearly about our 2% target,” he said. “The danger of undershooting is not yet verified.”
With inflation already below the 2% target and the 20-nation euro-zone economy flirting with recession, investors are betting on a series of rate cuts in the months ahead. After last week’s reduction in borrowing costs, officials remain tight-lipped about future action, though another step in December is very likely, according to people familiar with the matter.
Speaking at the Peterson Institute for International Economics, Rehn reiterated the ECB’s stance that the speed and scope of rate cuts will depend on “the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.”
Earlier Tuesday, President Christine Lagarde told Bloomberg TV’s Francine Lacqua that the direction of ECB borrowing costs is clear but the pace at which they’ll be lowered is still to be decided.
Speaking separately, Governing Council member Robert Holzmann said a faster-than-expected retreat in prices will allow the ECB to lower rates again before too long. His Portuguese counterpart Mario Centeno said officials would be ready to consider ramping up monetary easing should data suggest such a move.
Rehn said that a so-called soft landing — when inflation comes down without major job losses or economic slowdown — “seems plausible in the euro area.”
“However, growth is expected to remain sluggish,” he said.
Rehn also said, that experts at the Bank of Finland currently estimate the euro area natural rate to be “in the range of 0.2-0.8%.” With an inflation target of 2%, that would mean the nominal neutral rate, that neither stimulate nor restrict the economy, to be between 2.2% and 2.8%.
Centeno, one of the most dovish ECB officials, said earlier on Tuesday that the neutral rate might be “at 2% or slightly below 2%.”
(Updates with comment on inflation starting in second paragraph)
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