More ECB rate cuts expected

More European Central Bank interest rate cuts are coming and the deposit rate could hit the so-called neutral level in the first half of next year, Finnish central bank chief Olli Rehn said on Tuesday.

The ECB has already cut rates three times this year as prices have fallen and further cuts at each of its meetings at least through to next April are fully priced in.

“The direction of rate changes is clear,” Rehn told a conference in London.

“But the speed and scope of rate cuts will depend on our overall assessment at each meeting of three factors: the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.”

Cuts to the 3.25 per cent deposit rate could get it to the so-called neutral level, which neither stimulates nor brakes the economy in late winter or early spring, he said.

“Current market data and simple (or simplified) maths seem to imply that we would leave restrictive territory sometime in the spring/winter next year 2025,” Rehn said. “But that is just an observation from my side, not a commitment.”

The problem with “neutral” is that it is an estimate and not an exact level, making it difficult to target, especially because there is little agreement among policymakers on where the level is.

Rehn said that the Bank of Finland puts this estimate at between 0.2 per cent and 0.8 per cent for the real or inflation adjusted interest rate which, at 2 per cent inflation would imply a 2.2 per cent to 2.8 per cent range for the deposit rate.