ECB governor says it’s ‘reasonable’ to expect further rate cuts
There’s a very good chance that the European Central Bank’s (ECB) June rate cut won’t just be just a one-off.
On Aug. 21, Bank of Italy Governor Fabio Panetta said, “It’s reasonable to expect that from here on, we will be going into a phase of easing monetary conditions because inflation is falling and the world economy is slowing down.”
When asked about the possibility of rate cuts in September, Panetta said, “Obviously, I hope so.”
Panetta is a member of the ECB’s Governing Council responsible for setting interest rates.
As Bloomberg reported, Panetta is one of the first ECB council members to speak publicly during the central bank’s summer break, which began in mid-July and continues until September.
The ECB last met on July 18, where it voted to leave interest rates unchanged. But policymakers said the September meeting was “wide open” as they continued to track progress on inflation.
Since the ECB’s landmark interest rate cut in June, council members have struggled to clarify their positions on the pace and timing of future policy actions.
Some council members have expressed less conviction that progress on inflation was sufficient enough to justify lowering rates. Others, like Panetta, believe inflation concerns have been blown out of proportion.
The truth probably lies somewhere in the middle.
Managing inflation and economic growth
Annual inflation in the European Union more than tripled between 2021 and 2022, reaching a peak of 9.2%. According to Eurostat, this was the highest reading ever measured.
Meanwhile, inflation in the 20-member eurozone peaked at an even higher rate of 10.6% in October 2022.
The good news is that eurozone inflation has moderated significantly from those highs, reaching a low of 2.4% in November 2023 and then again in early 2024. Inflation picked up slightly between May and July, with the latest reading of 2.6%.
Moderating inflation means the ECB can slowly pivot to the other side of its mandate: promoting economic growth.
The eurozone economy grew 0.7% in all of 2024 before registering gains of just 0.3% in the first and second quarters of this year. According to the International Monetary Fund (IMF), the eurozone is on track to grow by just 0.9% this year.
The IMF said conditions are expected to improve in 2025 as “easing financial conditions” spur investment and consumption. In other words, the eurozone’s near-term growth prospects are tied to interest rates.
ECB President Christine Lagarde acknowledged in July that economic risks were “tilted to the downside,” suggesting that policymakers would prefer to continue cutting rates.
Because of that, “We would conclude that a September cut remains firmly on the agenda,” said JPMorgan economist Greg Fuzesi.
ECB Governing Council members will hold their next policy meeting on Sept. 12, followed by meetings in October, November, and December.