Fresh inflation fall gives ECB room to cut rates: IMF

DISINFLATION in the eurozone remains on track and the latest figures out this week confirm that the European Central Bank has room to cut interest rates further, International Monetary Fund European Department director Alfred Kammer said.

The ECB lowered rates in early June to acknowledge a quick fall in inflation but avoided any commitment about subsequent moves arguing that a return to its 2 per cent target by next year was not yet assured.

Kammer appeared more relaxed, despite a relatively strong, 4.1 per cent growth in service prices last month, which is raising some concern that domestic inflation could get stuck at high levels.

“Data, including release of June inflation figures, confirm the outlook and indicates that disinflation is still broadly in line with our expectations,” Kammer told Reuters on the sidelines of a conference, referring to Tuesday’s (Jul 2) data.

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

This outlook gives the ECB room to cut its 3.75 per cent deposit rate to 2.5 per cent, or a “neutral stance” by the third quarter of 2025, Kammer said.

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Markets only see the deposit rate falling to 2.75 per cent in the third quarter so the IMF’s is advocating a somewhat quicker easing cycle than investors now anticipate.

While policymakers are concerned that wages still grow too quickly and will put pressure on prices, Kammer argued that there is already a softening in the labour market and this will help cool prices.

“We are seeing already that the labour market is easing,” he said. “We see that in a in a number of countries and that indicates that the restrictive stance of monetary policy part is working in depressing aggregate demand.” REUTERS