ECB eyes interest rate cuts as euro zone inflation slows

ECB eyes rate cuts: European Central Bank (ECB) policymakers expressed growing confidence in cutting interest rates as euro zone inflation trends downward, reinforcing expectations of a shift in monetary policy.

Philip Lane, Gediminas Simkus, and Boris Vujcic highlighted the latest inflation and growth data, reinforcing their belief that inflation would return to the ECB's 2 per cent target by mid-next year.

Lane, the ECB's Chief Economist, emphasised optimism regarding April's inflation estimate and Q1 GDP, suggesting a timely return to target.

Simkus, Lithuania's central bank governor, went further, anticipating three rate cuts by 2024-end, indicating a dovish stance.

The ECB's anticipated rate cut on June 6 aligns with market expectations, with traders factoring in three cuts this year amidst dovish signals from the Federal Reserve and weak US jobs data.

Vujcic, the Croatian governor, hinted at policy easing to ensure inflation aligns with targets, despite staying in restrictive territory.

While the ECB monitors Fed actions, Lane stressed the importance of service prices to prevent disinflation risks.

As the ECB navigates monetary policy adjustments, a widening interest rate gap with the Fed could influence the euro and inflation dynamics, impacting ECB decisions.

The ECB forecasts inflation to fluctuate around current levels throughout the year before declining in 2025.

(with Reuters inputs)