New Delhi

The European Central Bank (ECB) will probably reduce interest rates further this year, with any additional easing contingent on inflation declining towards its 2 per cent target, a policymaker was quoted to have said.

Advertisment

The ECB cut rates in June but said it would not do so again as inflation was already above 2 per cent and there was significant doubt whether the target would be met.

While recent statistics paint a picture of continued wage and service price growth, Belgium’s central bank governor, Pierre Wunsch agrees that the initial cuts were simple decisions.

Wunsch said a second-rate cut is likely “if we have no major negative surprises” based on current forecasts. He dismissed it as a statement that the ECB can wait until September for improved projections.

Advertisment

Although inflation is expected to have eased marginally in June, the ECB is expecting a volatile trend from here on, possibly remaining at these levels for the rest of the year.

This could delay further cuts until a more distinct downward trend towards 2 per cent emerges. “To continue with cuts, I would need to be more confident that inflation is declining from 2. 5 per cent towards something closer to 2 per cent,” Wunsch said.

He raised worries about taking real interest rates below 1 per cent. At the moment, the ECB’s deposit rate stands at 3 per cent. 75 per cent, and markets expect one or two more this year, implying that there can be four cuts within the next 18 months.

Advertisment

The economic trends suggest slow economic growth and sound markets, although France elects a far-right president. Wunsch admitted there might be more political instability as several countries are in for necessary fiscal correction after years of fiscal recklessness.

“We now have five countries in excessive deficit procedures,” Wunsch said. “It will be difficult for all of them.”

Nevertheless, Wunsch was scathing of the suggestion that the ECB would have to turn to buying bonds in an emergency due to political market pressure.

Recent events have not represented unwarranted and disorderly market moves before intervention, and this is supported by the ECB officials.

‘We need to avoid any appearance of predictability; we cannot afford to imply any kind of mechanistic restrictions on our behaviour,’ Wunsch said. ’The judgment call depends on whether market movements are erratic and excessive’.