ECB can keep cutting rates even If Fed takes it slow, Vujcic says

Observer

13-02-2025

ZAGREB: The European Central Bank (ECB) could cut interest rates three more times this year, even if the US Federal Reserve moves more slowly, but policy easing depends on a rapid decline in underlying inflation, Croatian policymaker Boris Vujcic said.
The ECB has lowered borrowing costs five times since last June and hinted at further cuts, leaving investors speculating on the pace and extent of additional easing.
"The market is pricing in three more rate cuts this year," Vujcic said in an interview. "Those expectations are not unreasonable." However, upcoming data will be crucial, as projections indicate a significant drop in services inflation—the largest component of the consumer price basket and a key driver of excessive price growth over the past year.
"For those rate cuts to materialize, we need to see a slowdown in core inflation and services inflation," Vujcic, considered a moderate policy hawk, said.
Vujcic argued that the ECB can continue easing even if the Federal Reserve holds back. The Fed stated last month that it was in no hurry to cut rates, and unexpectedly high January inflation has raised the possibility that it might not cut at all in 2025.
High US interest rates generally strengthen the dollar and increase long-term borrowing costs, but Vujcic said current market movements do not pose a concern.
"The exchange rate is one factor we consider, but at the current level, it's not something we need to worry about." The euro has fallen about 7% against the dollar since autumn but has declined less than 3% on a trade-weighted basis, a relatively modest shift. A weaker euro raises inflation in the eurozone by making imports—especially energy—more expensive.
The ECB should avoid guiding investors on how far rates will fall, Vujcic said, but discussions on the terminal rate are expected to intensify soon. He suggested that the central bank may already adjust its language at the March meeting.
Currently, the ECB describes its policy stance as "restrictive," but another rate cut would lower the deposit rate to 2.5%, a level at which some policymakers may question whether it is still high enough to restrain the economy.
"We are certainly getting close to the discussion on when we should remove 'restrictive' from our language," Vujcic said. "This could already happen at our next meeting, but it will depend on incoming data.
"It should happen when it's no longer possible to say with full certainty that you're still in the restrictive zone," he added.
Weak economic growth in the 20-nation eurozone may slow inflation, but further deterioration is unlikely.
Consumption has been especially weak—accounting for the biggest deviation from expectations—but conditions remain in place for a recovery, supported by high savings, rising incomes, and strong employment.
"I don't see much of a risk for a recession. Then again, I also don't see any rapid recovery happening," Vujcic said.
One reason for optimism is increased labor market flexibility. Some firms struggling with weak demand are reducing working hours instead of laying off staff, which could help maintain consumer confidence by easing fears of job losses, he added. — Reuters