Further drop in inflation allows ECB to cut rates, IMF says

Further drop in inflation allows ECB to cut rates, IMF says
Further drop in inflation allows ECB to cut rates, IMF says

Disinflation in the euro zone remains on track and the latest figures released this week confirm that the European Central Bank can cut interest rates further, said Alfred Kammer, director of the European department of the International Monetary Fund.

The ECB cut rates in early June to acknowledge the rapid fall in inflation, but made no commitments about further action, arguing that a return to its 2% target by next year was not yet assured.

Mr Kammer appeared more relaxed, despite relatively strong 4.1% growth in services prices last month, raising concerns that domestic inflation could remain stuck at high levels.

“The data, including the release of June inflation figures, confirm the outlook and indicate that disinflation is still broadly in line with our expectations,” Kammer told Reuters on the sidelines of a conference, referring to Tuesday’s data.

“This means that we maintain our advice to the ECB that it should continue to gradually reduce the policy rate,” he added.

This outlook gives the ECB room to cut its deposit rate from 3.75% to 2.5%, a “neutral position” by the third quarter of 2025, Kammer said.

Markets only see the deposit rate falling to 2.75% in the third quarter, so the IMF is advocating a somewhat faster easing cycle than investors currently anticipate.

While policymakers worry that wages are still rising too quickly and putting pressure on prices, Kammer said the labor market is already softening, which will help cool prices.

“We are already seeing that the labor market is easing,” he said. “We are seeing this in a number of countries, which indicates that the restrictive monetary policy stance is contributing to a reduction in aggregate demand. (Reporting by Balazs Koranyi, editing by Tomasz Janowski)

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