The Chief Economist of the European Central Bank, Philip Lane, stated in an interview with the Financial Times that the ECB is prepared to cut interest rates next month. However, given that wage growth won’t normalize until 2026, the policy will need to remain tight this year.
The ECB has almost committed to a rate cut on June 6, so the focus has shifted to subsequent actions, with the market anticipating only one more rate cut this year.
In an interview published on Monday, Lane said, "Unless there are significant surprises, the current situation is sufficient to lift the highest level of restrictions."
“The best way to discuss this year is that we need to remain tight throughout, but within the tightness, we can afford to ease a bit,” he added.
Although Lane didn't explicitly mention the July policy meeting, several policymakers, including ECB Board Member Isabel Schnabel, have already stated that a second rate cut should not come too soon.
Wage growth is expected to slow down “significantly” next year, at which point policymakers can discuss normalizing policy.
Currently, the ECB's deposit rate stands at 4%, which is stifling economic growth. It is almost undisputed that at least the first few rate cuts to 3% are merely about lifting restrictions rather than providing stimulus.
"Before we move from the phase of maintaining tightness to considering normalization, we need to see more progress on inflation," Lane added.
Lane indicated that ECB policymakers need to keep policies tight this year to ensure that inflation continues to decline and does not remain above the ECB's target level. This "would be highly troublesome and potentially very painful."
Last week, a key wage indicator accelerated growth, causing some concern, but Lane said this data was anticipated and the slowdown is already underway.
"A slowdown does not necessarily mean an immediate return to a stable state," Lane remarked. "This year's adjustment is evidently quite sluggish."
