Investors expect the European Central Bank (ECB) to cut interest rates twice more this year and bring borrowing costs to as low as 2.25 percent in 2025, and these expectations are fair, according to ECB Governing Council member and Governor of the Bank of Finland Olli Rehn.
“If you look at market data, it implies that there would be two more rate cuts so that we would end up at 3.25 percent by the end of this year and, with the terminal rate — somewhere around 2.25 percent, 2.50 percent. In my view, they are reasonable expectations,” Rehn said on Tuesday.
Meanwhile, the Finnish central bank governor stated that while the ECB must ensure inflation returns to 2 percent, it shouldn’t overly dampen economic activity with interest rate cuts.
Inflation’s trajectory to impact policy rate decisions
The ECB began lowering interest rates this month following a historic increase to manage the eurozone’s soaring inflation. Uncertainty regarding interest rates has been rising amid consumer price growth, stubbornly high wage gains, and geopolitical tensions. Investors expect a 75 percent chance of a 45 basis points rate cut in 2024, particularly in September.
“In case we see the disinflationary process continuing and moving toward our symmetric 2 percent target of the medium term, then it is reasonable to assume that we stay with this direction and continue rate cuts,” Rehn added.
Despite recent data increases and multiple challenges facing the eurozone, disinflation is in progress, Rehn added.
Unlike some of his colleagues who would prefer to make decisions on rates at the quarterly meetings following fresh economic projections, Rehn views policy gathering as an opportunity for more moves following new economic reports.
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Economy gradually recovering
On economic recovery, Rehn said Europe “is heading for a gradual recovery this year”. Moreover, growth “should strengthen next year and the following year”. However, Rehn also warned against overburdening households and companies.
ECB interest rates are “still quite clearly in the restrictive territory and the aim is to ensure that the disinflationary process will continue”, he said.
Therefore, without compromising the inflation target, the ECB has a responsibility to support employment, sustainable development, and growth. This also means “that we do not unnecessarily delay the closing of the output gap”, Rehn said.
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