ECB’s Stournaras: If Inflation Keeps Falling, Gradual Cuts Appropriate; Risk of Undershooting Target

1 August 2024

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Yannis Stournaras on Thursday said that for current monetary policy it was essential that inflation be seen returning to target and that the continued materialisation of the ECB’s baseline for inflation would warrant gradual easing.

In an interview with Platow Brief, Stournaras, who heads the Bank of Greece, declined to say whether the ECB would cut rates in September, invoking data-dependence.

‘It is crucial that the incoming data, especially on wages, confirm that inflation will return to the target level of 2% in the medium term’, he said. ‘The ECB projections on inflation and growth in September are important. If inflation continues to fall as expected, gradual rate cuts would be appropriate in order to strengthen economic momentum.’

Downside risks to growth persisted and activity could be weaker in the coming quarters than projected in June, he said. This would tend to reduce inflation more than anticipated, he said.

‘This suggests that there is a risk of inflation falling below the 2% target in the medium term’, he said.

The risks were evenly distributed between undershooting and overshooting the ECB’s inflation target, justifying equal levels of concern, he said.

Stournaras indicated that his expectation of another two rate cuts by year-end remained valid. ‘We are on the right track’, he said. ‘In addition, growth is weaker than expected, which also speaks in favour of interest rate cuts.’

The 2.6% July flash estimate of euro area HICP was ‘in line with our projections’, he said, though the bumpiness evident in the result explained why ‘why we are proceeding with caution in our decisions.’

There were ‘no signs of a recovery in manufacturing and industrial production’, geopolitical fragmentation was also a threat, and worsening business confidence in Germany and France was ‘particularly worrying’, Stournaras said.

Estimates of the nominal neutral rate of interest placing it between 2% and 2.5% were probably reasonable, he suggested.