Rehn (ECB) sees two more rate cuts in 2024 as “reasonable” | Financial markets

Investor expectations that the European Central Bank will lower rates twice more this year – to 2.25% in 2025 – are “reasonable” for Bank of Finland Governor Olli Rehn. This was stated this Wednesday by the member of the ECB Governing Council, in one of the most explicit declarations of intent regarding the interest rate path of one of the executives of the eurozone central bank.

“If you look at the market data, it implies that there would be two more rate cuts, so we would end up at 3.25% at the end of this year and, with the terminal rate, somewhere around 2.25 %, 2.50%,” Rehn stressed this Tuesday in an interview in Helsinki. “In my opinion, they are reasonable expectations.” The governor of the Bank of Finland has also defended that, although central bankers have to ensure the 2% inflation target, they should not slow down economic activity too much.

The ECB began the path to lower interest rates at the beginning of this month, almost two years after it undertook an unprecedented rise in the price of money to alleviate the highest inflation seen in the euro zone. Most central bankers have been cautious about what happens next, concerned about recent spikes in the CPI, persistently high wage increases and geopolitical frictions.

Investors estimate that there are still 45 basis points of rate cuts left in 2024, equivalent to a second quarter-point move and a roughly 75% chance of another. The next one could come as early as September, and is fully scheduled for October. While stressing that the ECB will not commit in advance to a specific path, Rehn has made clear that it is rational to expect further reductions.

Despite the recent spikes in data, there is “a disinflationary process underway,” underlined the former European Commissioner for Economic Affairs. Unlike some of his colleagues who would prefer to make rate decisions at quarterly meetings that are accompanied by new economic projections, the Governing Council member sees each monetary policy meeting as an option for new moves, as officials They have new economic reports to digest in each of them: “I don’t think we should restrict ourselves unnecessarily, otherwise we would be better off canceling the so-called interim meetings and saving fuel and saving the planet.”

Regarding the economy, Rehn argues that Europe “is heading towards a gradual recovery this year” and that growth “should strengthen next year and the year after.” But he also warns against overburdening households and businesses: ECB rates “remain clearly restrictive and the aim is to ensure that the disinflation process continues.” “Without compromising our core objective, we also have a responsibility to support full employment, sustainable development and balanced growth.” This also means “that we do not unnecessarily delay closing the output gap,” he insisted.

The governor of the Bank of Finland has also taken the opportunity to downplay the recent nervousness generated by the early legislative elections in France. “Although we saw some increase in French bond spreads initially following the announcement of the new elections, the market stabilized relatively soon,” he said. “I don’t see any disordered market dynamics at the moment.” Although he stressed that the ECB continues to “monitor the situation very closely”, the member of the Governing Council considers that, for now, there is no need to intervene.

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