Further drop in inflation gives ECB room to cut rates, IMF says

SINTRA, Portugal (Reuters) – Disinflation in the euro zone remains on track and the latest data released this week confirm that the European Central Bank has room to cut interest rates further, said Alfred Kammer, director of the European department of the International Monetary Fund (IMF).

The ECB cut rates in early June to acknowledge a rapid decline in inflation, but avoided any commitment on further measures, arguing that a return to its 2% target by next year was not yet assured.

Kammer appears more relaxed, despite relatively strong 4.1% growth in services prices last month, raising concerns that domestic inflation could stagnate at high levels.

“The data, including the release of June inflation figures, confirm the outlook and indicate that disinflation is still broadly in line with our expectations,” Kammer told Reuters on the sidelines of a conference, referring to Tuesday’s data.

“This means that we maintain our policy advice to the ECB, which is that it should continue to gradually reduce the policy rate,” he said.

This outlook gives the ECB the scope to cut its deposit rate from 3.75% to 2.5%, a “neutral position”, by the third quarter of 2025, Mr Kammer said.

Markets only see the deposit rate falling to 2.75% in the third quarter, so the IMF is advocating a somewhat faster easing cycle than investors currently anticipate.

While policymakers worry that wages will continue to grow too quickly and that this will put pressure on prices, Kammer argued that there is already a slowdown in the labor market and that this will help cool prices.

“We are already seeing the labor market loosening,” he said. “We are seeing that in a number of countries and it indicates that tight monetary policy is partly contributing to depressing aggregate demand.”

(Reporting by Balazs Koranyi, edited by Tomasz Janowski)