Expectations that the European Central Bank will adjust the current configuration of its monetary policy twice more this year by lowering the cost of borrowing are fair, according to Governing Council member of the financial institution Olli Rehn.
The implementation of the mentioned scenario in the context of the ECB’s activities means that interest rates will be cut to 2.25% in 2025.
Olli Rehn is the chief of the Bank of Finland. On Tuesday, June 25, during a conversation with media representatives in Helsinki, he said that ECB officials should ensure that the inflation rate returns to the target level of 2%, but at the same time they should not take any excessive measures related to a decrease in the intensity of economic activity.
Olli Rehn noted that the current market data indicates that the European financial regulator will cut rates twice more by the end of 2024. In his opinion, by the end of the current year, the cost of borrowing will be around 3.25% with a terminal rate of around 2.25%-2.50%. Olli Rehn says that the corresponding forecast regarding the prospects for easing the monetary policy of the European financial regulator belongs to the category of reasonable expectations.
This month, the ECB started cutting interest rates. Before that, the European financial regulator operated within the framework of a more rigid monetary policy paradigm. The relevant decisions of the ECB were aimed at countering the inflationary process, which turned out to be one of the worst configurations of the situation of rising prices for goods and services in the entire history of the eurozone. Since then, most officials have taken an extremely cautious approach in the context of forecasting which monetary policy strategy will be implemented by the European financial regulator in the future. The corresponding caution is due to the understanding of the potential and already materialized in the past impact of negative factors of the current configuration of global and regional reality, including in its economic dimension. In this case, circumstances such as a sharp increase in consumer prices, which has been an obvious fact in recent years, stubbornly high rising wages and tension in the space of geopolitics are implied. It is worth noting that all of these factors have already had an impact on the economic situation in Europe on one scale or another and in the foreseeable future may still become sources of transformation of the situation.
Currently, there is a widespread expectation among investors that in 2024 the ECB will still cut interest rates by 45 basis points, which corresponds to an increase in this indicator by the second quarter of a percentage point. Also, within the framework of this vision of the future actions of the European financial regulator in the context of making changes to the monetary policy strategy, it is noted that the probability of another lowering of the cost of borrowing is approximately 75%.
It is widely believed among experts that the next interest rate cut by the ECB may occur as early as September. They also assume that in October, based on observations of the actions and statements of the European financial regulator, it will be possible to form a final understanding of what the configuration of monetary policy will be by the end of 2024.
On Wednesday, June 26, German bonds edged lower across the curve in early trading. The yield on 10-year bonds rose by two basis points, reaching 2.43%.
Olli Rehn, during his communication with media representatives, underlined that the European financial regulator will not pre-commit to any particular path in the context of monetary policy. This statement is evidence of the realism and justification of expectations regarding further lowering of the cost of borrowing.
Olli Rehn says that if the disinflationary process continues and it moves towards a symmetrical 2% target in the medium term, it is reasonable to assume that the ECB will cut interest rates in the future. According to him, there is currently a continuation of the mentioned process, noting that this is a bumpy road, the understanding of which was initially. In the appropriate context, speaking symbolically and metaphorically, Olli Rehn stated the need to see the forest for the trees.
During a speech at a conference in Helsinki on Wednesday, June 26, Mr. Rehn repeated his point of view regarding the future prospects for the dynamic and the configuration of the ECB’s monetary policy, additionally noting that the European financial regulator is ready to ensure timely stabilization of inflation to the medium-term target level in 2%.
It is worth noting that many ECB officials prefer to make decisions on interest rates at quarterly meetings, during which they study current data on the state of affairs in the economic reality of the eurozone. At the same time, Olli Rehn sees each meeting as an opportunity for further action, since officials have access to new reports on the condition of the economy. In this context, he noted that certain restrictions should not be adhered to unless necessary.
Speaking on the state of affairs in the European economic space, Olli Rehn said that the system is currently moving towards a gradual recovery in 2024. He also assumes that in 2025 the dynamics of economic growth will intensify. Moreover, Olli Rehn predicts that the upward trajectory of the corresponding process will continue in the coming years. At the same time, he warned against overburdening companies and households.
Olli Rehn says that ECB rates are still in a fairly restrictive territory and the goal is to ensure that the disinflationary process will continue. He noted that the European financial regulator has a responsibility to support full employment, sustainable development, and balanced growth, without compromising the primary objective. Olli Rehn also said that ECB officials are not delaying the closing of the output gap unnecessarily.
The forecasts of the chief of the Bank of Finland are likely to ease the nervousness that formed after French President Emmanuel Macron announced that early elections would be held. The news from Paris came as a surprise. In the eurozone business environment, the holding of early elections in France was perceived as a risk for economic activity.
Olli Rehn says that after Emmanuel Macron’s statements, the market stabilized relatively quickly. At the same time, he noted that during a certain period, there was a slight increase in the spreads of French bonds. According to him, at present there is no disorderly dynamic of the market. He noted that the ECB continues to monitor the situation very closely and underlined that there is currently no need to consider the possibility of intervention, for example, by applying the transmission protection instrument, which was created in 2022 to prevent excessive market turmoil amid rising interest rates.
Olli Rehn says that there will be no disorderly turbulence if key political figures take rational actions. He described what happened in France recently as a repricing. Olli Rehn also stated his disagreement with the fact that another debt crisis could be brewing, similar to the one in which he took part in the fight as European Commissioner for Economic and Monetary Affairs. Mr. Rehn reckons that the central banker has to always be worried, has to be concerned, but it has to be calibrated concern.
