ECB Hints at Gradual Rate Cuts as Inflation Nears 2% Target, Eyes September Meeting

European Central Bank Governing Council member Boris Vujcic has highlighted that the ECB might have room to gradually reduce interest rates as inflation trends closer to the 2% target. However, he stressed the importance of proceeding cautiously, as risks still loom. "If data aligns with our projections, predicting that inflation will fall to 2% by 2025, this would strengthen our confidence in slowly easing monetary policy restrictions," said the Croatian central bank governor. Yet, he cautioned that any actions should be taken very slowly. Attending the Federal Reserve's annual Jackson Hole symposium, Vujcic hinted that a rate cut in September is possible, an expectation shared by many investors. "There are still some data points to come out between now and the next meeting," he remarked, "but so far, nothing has significantly deviated from our expectations or forecasts." He commented that inflation trends are "largely in line with our projections," adding that "uncertainty around the inflation outlook has slightly diminished." Martins Kazaks, another ECB Governing Council member, echoed Vujcic’s sentiments, stating he is prepared to discuss additional rate cuts in next month’s meeting. Kazaks expressed confidence in inflation returning to 2% while conveying his concerns regarding the economic landscape. "Given the data we currently have, I am very open to discussions about a rate cut in September," said Kazaks during the Jackson Hole symposium. Kazaks pointed out that key indicators like the second-quarter wage growth slowdown bolster the confidence that inflation will revert to the 2% target by 2025. He emphasized the importance of new forecasts and August's inflation data. "Overall, even if inflation stabilizes in the coming months, it aligns with further gradual rate cuts," he noted. Kazaks and other ECB council members unanimously suggested that lowering borrowing costs would be beneficial. He added that even if deposit rates were cut a few more times in the short term, monetary policy would remain tight. Currently, the ECB’s deposit rate stands at 3.75%. Germany’s economy has shown signs of unexpected deceleration, as indicated by key service sector data from S&P Global in August. If the influence of the upcoming Paris Olympics is disregarded, the outlook for the Eurozone remains bleak. The ECB's July meeting minutes, released on Thursday, noted that the September meeting is widely seen as an opportune moment to reassess the level of monetary policy restrictions. Nonetheless, the council emphasized the need to remain open-minded towards September’s meeting, without over-emphasizing any single data point, due to persistent risks surrounding the inflation outlook. Looking ahead, the ECB’s new monetary policy meeting, scheduled in three weeks, will determine how to adjust borrowing costs to align with the economic and inflationary conditions.