(Bloomberg) -- European Central Bank Governing Council member Gediminas Simkus said people shouldn’t obsess over the size of a probable interest-rate cut in December, since the question of where borrowing costs will end up is more important.
With money-market bets fluctuating on a possible half-point reduction at the final decision of the year, the Lithuanian central-bank chief said he couldn’t justify such a big move at present, but it’s the direction of travel that is key anyway.
“As I read data, I don’t see a case for 50 basis-point cuts,” he said in an interview at the International Monetary Fund meetings in Washington. “What matters more than a single cut is where we’re going to.”
The remarks extend a public debate among policymakers on just how aggressively the ECB should respond to a slowing economy amid mounting evidence that inflation is under control.
As traders this week raised the chances of a half-point move, Portugal’s Mario Centeno said officials should consider bigger cuts than the quarter-point steps deployed until now, while Belgium’s Pierre Wunsch retorted that talk of doing so is “premature” at this stage.
Since June, the ECB has brought the key deposit rate down to 3.25% — after last week’s reduction — from a peak of 4%.
“Rates are still in restrictive territory, and we will need to reduce them further, according to the baseline,” Simkus said. “If we were to cut in December, we would be at 3%, and that already might be the upper limit of the range to the neutral rate, as some estimates indicate.”
He spoke after purchasing manager indexes showed the downtrend in euro-area private-sector activity extended into a second month, with the region’s two biggest economies weighing on output.
While the region is “quite sluggish,” some sentiment indicators suggest downside risks are materializing, he said, adding that “it’s likely that growth this year and next will be weaker than forecast in September.” Last month, ECB staff foresaw growth of 0.8% and 1.3% in 2025 and 2026.
Even so, Simkus observed that evidence of feeble expansion doesn’t on its own justify a bigger reaction, and the ECB isn’t behind the curve for now.
“I think that cutting by 50 basis points would also contain a message by itself,” he said. “The economy is not doing that badly. We are consistently following a meeting-by-meeting data-dependent approach, and it’s not the case that we’re late in terms of reducing rates.”
While a pickup in consumer-price growth appears likely in coming months, it won’t reach levels anticipated by the ECB, Simkus said, who added that “the path will be bumpy, but not as bumpy as expected before.”
“We are on a disinflationary path,” he said. “Even if service inflation remains high, it is also showing signs of slowing down, and probably faster than we thought.”
He doesn’t see an issue in loosening monetary policy and at the same time stopping in full reinvestments from past large asset purchases. Quantitative tightening, known as QT, is seen by many as a restrictive impulse.
“We shouldn’t stop our QT plans — even at a time when we are lowering interest rates,” Simkus said.
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