MNI INTERVIEW: Cut Not Guaranteed In September - ECB's Muller
MNI speaks to Bank of Estonia Governor Madis Muller.
The European Central Bank looks likely to bring inflation back to target in a timely fashion, though another rate cut is not guaranteed in September and any failure to restore inflation to 2% in 2025 could damage its credibility and risk de-anchoring expectations, Bank of Estonia Governor Madis Muller told MNI.
“I have a fair degree of confidence that inflation is heading to 2% by the second half of next year, but one cannot have complete confidence in it yet,” Muller said in an interview on the sidelines of the ECB’s Forum in Sintra.
But, barring inflation surprises, “there is room for different scenarios" with regards to the ECB's policy action in September, he said.
Asked about market expectations for interest rate cuts, Muller said that it is correct to assume that if the ECB is successful in bringing inflation down to 2% next year “it is possible to lower interest rates from the current restrictive territory”.
But, he added: “How fast exactly and to what extent? That really will depend on the actual economic data and inflation developments in coming months and quarters.”
MARKET EXPECTATIONS
June’s data also indicates that there is some persistence in core and services inflation that at current levels are not yet consistent with 2% inflation, he said.
Elevated geopolitical risk could also feed into inflation expectations, Muller said, though he added that it was difficult to incorporate into decision making.
“It is something you have to deal with,” he added.
So far, the ECB has maintained its credibility, and people understand that it cannot control inflation in the short term, said Muller. But he added that it might become more difficult to anchor expectations if “we don't get back to 2% as we expect to happen, and secondly if there is another shock and inflation remains above 2% for an extended period of time.
Asked about concerns over faltering growth for the second half of 2024, Muller said there are risks in both directions. A gradual improvement of the economy is more likely than a strong rebound, but the risk of undershooting the inflation target seems to be low, he said.