Investor expectations for the European Central Bank to loosen monetary policy twice more this year — and bring borrowing costs to as low as 2.25% in 2025 — are fair, according to Governing Council member Olli Rehn.
In some of the most explicit remarks from an ECB policymaker on the path for interest rates, the Finnish central bank chief also said that while officials must ensure inflation returns to 2%, they should not overly dampen economic activity.
“If you look at market data, it implies that there would be two more rate cuts so that we would end up at 3.25% by the end of this year and, with the terminal rate — somewhere around 2.25%, 2.50%,” Rehn said Tuesday in an interview in Helsinki. “In my view, they are reasonable expectations.”
The ECB began lowering rates this month following an historic spate of hikes to tame the eurozone’s worst-ever inflation. Most officials have since been cagey on what will happen next — mindful of the recent uptick in consumer-price growth, stubbornly high wage gains and geopolitical friction.
Investors reckon there are still 45 basis points of rate cuts to come in 2024 — equating to a second quarter-point move and about a 75% chance of another. The next may arrive as soon as September, and is fully priced by October.
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German bonds edged lower across the curve in early trading on Wednesday. The 10-year yield rose two basis points to 2.43%, in line with its recent range.
While underscoring that the ECB will not pre-commit to any particular path, Rehn made clear that it is rational to expect further reductions.
“In case we see the disinflationary process continuing and moving toward our symmetric 2% target of the medium term, then it is reasonable to assume that we stay with this direction and continue rate cuts,” he said.
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Despite recent data overshoots, “we have a disinflationary process going on” and “always knew that it’s going to be a bumpy road”, Rehn said. “We have to see the forest for trees.”
Unlike some of his colleagues who would prefer to take decisions on rates at the quarterly meetings that are accompanied by fresh economic projections, Rehn sees each policy gathering as an option for further moves since officials have new economic reports to digest for each.
“I don’t think we should restrict ourselves unnecessarily,” he said. “Otherwise we might as well cancel the so-called interim meetings and save fuel and save the planet.”
Turning to the economy, Rehn said Europe “is heading for a gradual recovery this year” and that growth “should strengthen next year and the following year.” But he also warned against over-burdening households and companies.
ECB rates are “still quite clearly in the restrictive territory and the aim is to ensure that the disinflationary process will continue,” he said. “Without compromising our primary objective, we also have a responsibility to support full employment, sustainable development and balanced growth.”
This also means “that we do not unnecessarily delay closing of the output gap,” Rehn said.
“While we saw certain increase in spreads of French bonds initially after the announcement of the new elections, the market relatively soon stabilised,” he said. “I don’t see any disorderly market dynamics for the moment.”
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While stressing that the ECB is continuing to “monitor the situation very closely,” Rehn said that, for now, there is no need to think about intervening — for example via the Transmission Protection Instrument that was created in 2022 to ward off undue market turmoil as interest rates were lifted.
“If key political actors play rationally, we should not be ending up in such kind of disorderly turbulence,” he said. “I don’t see that discussion on the TPI is topical for the moment.”
Describing what’s happened of late in France as a “repricing,” Rehn rejected the notion that another debt crisis may be brewing — like the one he helped battle back when he was European commissioner for economic and monetary affairs.
“I don’t see that in the cards,” he said. “A central banker has to always be worried, has to be concerned, but it has to be calibrated concern.”
Chart: Bloomberg
