Investor expectations for the European Central Bank (ECB) to loosen monetary policy have been reinforced by comments from Governing Council member Olli Rehn. Rehn indicated that market expectations for two more rate cuts this year are reasonable, potentially bringing borrowing costs to as low as 2.25 per cent by 2025. He emphasised the need to ensure inflation returns to 2 per cent without overly dampening economic activity. Rehn indicated in Helsinki on Tuesday that he views the projected rate cuts as reasonable expectations, suggesting that rates could decline to 3.25 per cent by year-end and ultimately settle around 2.25 per cent to 2.50 per cent. The ECB recently began reducing rates following a series of hikes aimed at addressing record-high inflation in the eurozone. Despite recent economic data suggesting inflationary pressures, Rehn highlighted ongoing disinflationary trends that support further rate cuts if necessary. While cautious about committing to a specific timeline, Rehn underscored the rationale for potential future reductions, noting that economic conditions and inflation trends would guide policy decisions. The market reaction has been mixed, with German bond yields edging lower initially on Wednesday. Investors currently anticipate up to 45 basis points of additional rate cuts in 2024, with expectations of a quarter-point cut as soon as September. Rehn's remarks suggest a nuanced approach to policy adjustments, advocating for flexibility in decision-making rather than restricting actions to quarterly meetings. He expressed optimism about Europe's economic recovery while warning against burdening households and businesses excessively. Looking ahead, Rehn downplayed recent market turbulence surrounding political developments in France, indicating that the ECB is closely monitoring the situation but sees no immediate need for intervention. Attribution: Bloomberg.
