ECB Expects More Rate Cuts as Inflation Fears Abate

• The European Central Bank expects to cut interest rates further if inflation settles at its 2% target. ECB President Christine Lagarde and the bank's most influential policy hawk, Isabel Schnabel, cemented market bets on further gradual reductions in borrowing costs in the euro zone as the economy stutters and fears about high inflation fade.
• "If the incoming data continues to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further," Lagarde said in a speech in Vilnius. Inflation in the euro zone was 2.3% last month and the ECB expects it to settle at its 2% target next year after hitting double digits in the wake of Russia's full-scale invasion of Ukraine in 2022.
• The euro zone's central bank lowered its key rate last week for the fourth time this year and opened the door to more reductions by removing a reference to keeping rates "sufficiently restrictive".
• Schnabel was more explicit, saying the ECB should keep cutting interest rates gradually until they reach neutral. "Price stability is within reach," Schnabel told an event in Paris. "Considering the risks and uncertainties we are still facing, lowering policy rates gradually towards a neutral level is the most appropriate course of action."
• While a neutral interest rate is a vaguely defined concept, Schnabel sees it between 2% and 3%, and Lagarde has said that ECB research puts it at 1.75%-2.5%. This indicates that several more cuts in the 3% deposit rate may come before the neutral debate heats up.

(Source: Reuters)