Policymakers at the European Central Bank are divided on the need to consider a large interest rate cut of half a percentage point in December, even as downside risks dominate both economic growth and inflation.
The comments come shortly after the European Central Bank made sequential interest rate cuts for the first time in 13 years at its October meeting.
The move, which marks the central bank's third quarter-point cut this year, was fully priced in by markets after policymakers pointed to lower inflation risks and weaker growth prospects.
“The reality is that the inflation rate in September was very low, much lower than we expected,” Portuguese Central Bank President Mario Centeno told CNBC's Karen Tso on Wednesday.
“We have to take that into our story,” Centeno said. “Then, we need to look at the data coming in, the trend in the data that we are observing and certainly 50 basis points can be on the table because we are still relying on the data and the data that we are getting are points in that trend.”
A cyclist drives his car along a road under a railway bridge near the headquarters of the European Central Bank (ECB) in Frankfurt am Main, western Germany, on July 18, 2024, before an ECB press conference on euro zone monetary policy.
Kirill Kudryavtsev | AFP | Getty Images
The euro zone inflation rate was recently revised to 1.7% in September, down from the previous official estimate of 1.8%. This compares to a reading of 2.2% in August.
September was the first month that euro zone inflation fell below the European Central Bank's 2% target since June 2021, marking an end to years of excessive price growth and boosting expectations of further interest rate cuts in the near term.
Along with Centeno, Klaas Knot, a member of the board of the Dutch ECB, said a half-point interest rate cut at the central bank's December meeting could not be ruled out. But he added that such a move would require some data degradation.
“I think we're very confident that inflation will return to our 2% target somewhere over the next year,” Knott told CNBC on Wednesday.
“I would also say that I view the risks around that baseline as being reasonably contained,” he added.
“So, if this scenario actually comes true and if the December forecasts continue to confirm this scenario as well, that will allow us to gradually take our foot off the brake and continue to cut interest rates until we reach, for example, the neutral zone, where we are no longer mimicking or slowing down the economy yet.” now.”
“Look at the data”
ECB President Christine Lagarde said last week that central bank policymakers only discussed the merits of a 25 basis point cut at the meeting, rather than a larger 50 basis point cut.
“I'm sure some of my colleagues will support a big cut, others won't. In my case, I would say I would look at the data,” Austria's central bank president, Robert Holzmann, told CNBC on Wednesday.
Holzmann said policymakers could not be prevented from making their case for deeper interest rate cuts in December, but in his view the ECB's recent move of a quarter of a percentage point was a “precautionary” move, and it remains plausible that The central bank will need to hold steady at the end of the year.
“If things get really bad as some claim, we could have 25 more, (but) 50 I would say right now, with the data, no,” Holzman said.
The European Central Bank has repeatedly warned that inflation is likely to rise over the coming months, before falling to its target level next year.
Several major central banks have recently taken steps to ease monetary policy, with inflation falling in many high-income countries.
However, the International Monetary Fund said on Tuesday that although the global battle against inflation is “almost won,” downside risks are “increasing and now dominate the outlook.”
“We will definitely see some cuts.”
“It is clear that we are moving in the direction of easing monetary policy,” Gediminas Simkus, a member of the European Central Bank’s Governing Council and governor of the Bank of Lithuania, told CNBC on Wednesday.
“So what I can say clearly at this stage is that we will definitely see some reductions in the upcoming meetings. But what the reductions are, how big they are, or whether they (will happen) will depend on the data,” he added.
Asked if he was comfortable with market participants pricing in successive ECB interest rate cuts until about the middle of next year, Shimkus said he was uncomfortable with calls for deep interest rate cuts.
“I don't think these big cuts, you know, are going to be justified one way or another unless we see something really unexpected and bad in the data. And so far, I don't think that's going to be the case,” he added.
Joachim Nagel, a policymaker at the European Central Bank and head of the Bundesbank, said he did not want to speculate on the potential size of further interest rate cuts.
“We live in a very uncertain environment, so we have to wait for new data and then we have to decide,” Nagel told CNBC on Wednesday.
— CNBC's Jenny Reed contributed to this report.
