The European Central Bank (ECB) is set to hold a meeting next week, where it may decide to cut its first interest rate. This would make the ECB the first major central bank to begin a rate-cutting cycle. Smaller economies like Sweden and Switzerland’s central banks have already taken steps in this direction, but the US Federal Reserve is likely to start its interest rate cuts later in the fall.
In an interview with the Financial Times, ECB chief economist Philip Lane hinted at a potential rate cut by stating that conditions are favorable to remove some of the top level of monetary policy constraint. This could mean lowering the market-leading deposit rate from 4.0 percent to 3.75 percent to slightly ease the tight monetary policy.
Lane did not provide specifics on the path of future interest rate cuts but mentioned that monetary policy would remain tight throughout 2024. Economists are anticipating two or three interest rate cuts from the ECB this year, possibly bringing the deposit rate to 3.25 or 3.5 percent by December.
The ECB’s forecast suggests that inflation will approach its target of two percent this year and stay around that level into the middle of next year. Philip Lane surprised some by suggesting that a balanced interest rate in the euro area could be just over two percent in the long run, indicating room for relaxation in monetary policy.
Factors such as wages, inflation, and the neutral interest rate play a role in determining the path of monetary policy adjustments. The ECB will closely monitor these factors before making any specific announcements about interest rate cuts. Lane reassured that despite potential changes in inflation and other economic indicators, monetary policy is still relatively tight in
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