Yannis Stournaras, a prominent dove amongst European Central Bank (ECB) policymakers, told Reuters that the ECB should observe inflation consistently below 3 per cent by mid-2024 before considering a reduction in historically high borrowing costs.

Stournaras' remarks reveal a gap between the ECB's stance and market expectations. Investors anticipate interest rate cuts as early as March or April, despite President Christine Lagarde's recent opposition. In an interview with Reuters, Stournaras cautioned against the risk, stating, "We can't risk it. We need to see inflation sustainably below 3 per cent by the middle of the year before cutting rates."

During the previous week, the ECB opted to keep rates unchanged and projected an average inflation of 2.8 per cent for the current quarter, 2.9 per cent for the first three months of the following year, and 2.7 per cent in the second quarter of 2024. Stournaras outlined additional criteria for rate adjustments, including indicators such as unit labour costs, unit profits, and inflation expectations aligning with a return to 2 per cent. He also emphasised the need to evaluate overall economic conditions.

Bostjan Vasle, Stournaras' counterpart from Slovenia, echoed similar sentiments to Reuters, asserting that the ECB would require until spring to reassess its rate outlook, dismissing premature market expectations of imminent cuts. Reuters had exclusively reported the previous week that ECB policymakers did not anticipate altering their stance on the necessity of maintaining high rates before their March meeting, making any reduction unlikely before June.

Stournaras had been the first ECB policymaker in the autumn to openly discuss the possibility of rate cuts around mid-2024. Initially, markets speculated on a prolonged period of high rates, but a shift occurred due to lower-than-expected inflation readings and a change in the US Federal Reserve's rhetoric. Presently, money markets are pricing in a 150-basis-point reduction in ECB rates in 2024, bringing the deposit rate paid by the ECB to 2.5 per cent.

(With Reuters Inputs)