Monetary policy|The increase in consumer prices, i.e. inflation, is still slowing down, but the headwinds of the euro area economy have intensified.
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Olli Rehn thinks the ECB should lower the key interest rate at the October meeting.
The slowdown in inflation and the weakened growth prospects in the euro area support the interest rate cut.
Financial markets consider a 0.25 percentage point rate cut on October 17 very likely.
Bank of Finland the general manager Olli Rehnin thinks the European Central Bank (ECB) should lower its key interest rate at the meeting held in mid-October.
“We have received more confirmation from recent statistical data that inflation is slowing down. This means, at least in my eyes, that there have been more grounds for lowering the interest rate at our October meeting. The recent weakening of the euro area’s growth prospects is tipping the scales in the same direction,” Rehn said at a press conference on Tuesday.
The Governor of the Bank of Finland is ex officio a member of the European Central Bank’s monetary policy decision-making council. The Council decided to lower the key interest rate for the first time in nearly five years in June and for the second time in September. The interest rate is currently 3.50 percent.
In the financial markets, it is considered very likely that the Council will decide on October 17 to cut the key interest rate by 0.25 percentage points. The reason is the slowdown of inflation to less than two percent in the large euro countries and the economic stagnation.
Economic growth has been slow in the euro area this year and industrial production has developed weakly. It has been affected by the increase in energy costs, which has been clearly stronger than in other economic areas.
“In my opinion, the headwinds still do not justify declaring that a so-called soft landing has been ensured. This should be taken into account in the future decision-making of monetary policy without jeopardizing price stability.”
According to Rehn, the direction of monetary policy is clear, meaning interest rate cuts will continue. Economists anticipate that the key interest rate will be 2.25 percent at the end of next year.
“Their pace and scale depend on the overall assessment made by the ECB Council at each meeting, based on the latest data and an analysis of the economic trend.”
A soft landing means that the central bank can tame rapid inflation without derailing the economy into recession.
President of the ECB Christine Lagarde hinted on Monday that the key interest rate will be lowered in three weeks.
“The latest data confirm our confidence that inflation will return to our target in time. We will take this into account at our monetary policy meeting in October,” Lagarde said on Monday at a hearing of the European Parliament’s Economic and Monetary Affairs Committee.
Upwind despite this, the euro area economy has at least so far avoided recession and is slowly getting stronger. Rising wages and slowing inflation strengthen the purchasing power of households and increase consumption. Over time, interest rate cuts also speed up investments.
According to the forecast published by the European Central Bank in mid-September, the economy of the euro area will grow by 1.3 percent next year and 1.5 percent in 2026. The employment trend is strong: there are approximately seven million more employed in the euro area than at the end of 2019.
“One conclusion from the outlook for economic growth, employment and inflation in the euro area is that monetary policy has been relatively successful in taming inflation,” said CEO Rehn.
When the central bank slows down inflation by tightening monetary policy, it usually comes at a cost. Economic growth slows down and employment weakens. According to CEO Rehn, these costs are likely to be lower than previous interest rate hike phases.
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