On Friday, European Central Bank (ECB) officials unanimously supported a reduction in interest rates in the forthcoming months, given that the pace of inflation decline within the eurozone surpasses expectations. Key central bank figures from Germany, France, Finland, and Lithuania emphasised the likelihood of the ECB reducing its historically high borrowing rates, reinforcing a signal initially given by ECB President Christine Lagarde the previous day.
ECB Policymakers Rally Behind a Potential Rate Cut in Future
Although their opinions regarding when to initiate the rate cut varied slightly, the consensus leaned towards action before the summer. Joachim Nagel, President of the Bundesbank, indicated in an interview with the German podcast Table Today that a rate cut before the summer holidays is becoming increasingly probable.
Nagel’s stance is particularly noteworthy since the Bundesbank’s president is traditionally known for a cautious approach to prematurely adjusting rates. The ECB is scheduled for three meetings before its summer break, on April 11, June 6, and July 18, potentially setting the stage for rate adjustments.
Francois Villeroy de Galhau, head of Banque de France and considered a policy centrist, suggested that a rate cut could be anticipated in the spring, a period he defines as spanning from April to June 21. Similarly, Olli Rehn of Finland mentioned that rate-cutting discussions would be revived during the April and June meetings.
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The perspective from Lithuania was more pointed, with the country’s representative foreseeing a rate cut in June as “very likely,” potentially marking the beginning of a series of 25 basis point reductions. Gediminas Simkus, speaking in Vilnius, underscored June as the prime month for such a decision while considering an April move less probable.
Following these statements, financial markets in the eurozone have fully anticipated a rate decrease by June and expect three additional cuts by December. These reductions would lower the ECB’s bank deposit rate from 4% to 3%.
The ECB recently adjusted its growth and inflation forecasts downward, and according to Lagarde, by June, the central bank will possess “a lot” of the necessary information to make an informed decision on rate adjustments.
While there has been scepticism about the ECB acting ahead of the U.S. Federal Reserve, Finnish Governor Olli Rehn dismissed the notion of the ECB operating under the Fed’s shadow in a blog post, emphasising the ECB’s independent decision-making.
