(Bloomberg) -- European Central Bank Governing Council member Olli Rehn said a December interest-rate cut is likely and further reductions are possible, but officials should remain cautious and move step by step.
Disinflation in the euro-area is “well on track” and the growth outlook “seems to be weakening,” the Finnish central-bank chief told Bloomberg Television on Tuesday in London – and “that strengthens the case for a rate cut in December.”
Looking further ahead, Rehn said the direction for borrowing costs is clear, “but the speed and magnitude will depend on the incoming information and our analysis.”
The ECB has lowered its key deposit rate three time this year to 3.25% from a peak of 4%. Policymakers have signaled another reduction at the final rate meeting of the year next month, but the pace and extent of further action is unclear.
Stronger-than-expected growth in the third quarter and a slight upside surprise in inflation — increasing again to 2% in October – bolstered the case for the more hawkish officials who urge caution on additional easing.
Rehn sidestepped a question on going for a half-point move in December, arguing that the ECB must have “freedom of action.”
Still, the ECB “could be leaving the restrictive territory some time in the spring, winter of next year, 2025,” he said.
In October, he 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%.
On Monday, Greece’s Yannis Stournaras said that rates could end up “possibly close to 2% around next September.”
Speaking later at a conference in London, Rehn added that his thoughts on when restrictive territory might be exited is “just an observation from my side, not a commitment.”
Last week, Donald Trump’s victory in the US presidential elections and the collapse of Germany’s three-party government added to the uncertainty about the outlook for the 20-nation bloc’s economy.
“Concerning the time line of the effect of US tariffs, that’s going to be medium-to-long term, and we can only react in monetary policy to economic developments we know and we see and we feel,” Rehn said.
He hopes that there will be no escalation between the US and Europe. “The last thing we need now is yet another trade war.”
Speaking separately to reporters in Vienna, his Austrian counterpart Robert Holzmann said the ECB would need to react if Trump’s policies led to faster-than-anticipated inflation in the US, and a Fed reaction to that, potentially pushing the euro-dollar exchange rate toward parity.
--With assistance from Jana Randow, Marton Eder and Tom Rees.
(Updates with Rehn London speech in 10th paragraph)
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