The European Central Bank (ECB) is inching closer towards a potential rate cut in June, according to Bundesbank President Joachim Nagel. However, he cautions that several factors, including high core and service inflation, could still influence the decision.
**Rising Probability of a June Rate Cut**
Nagel acknowledged that the probability of a rate cut is increasing ahead of the June meeting. However, he emphasized that the bank’s decision will primarily depend on incoming inflation data. If projections indicate a decline in inflation, approaching the ECB’s target of 2% by 2025, the likelihood of a rate cut will rise significantly.
**Lingering Inflation Headaches**
Nagel pointed out that core inflation and service inflation remain elevated. The ECB will closely monitor these components to ascertain whether inflation is genuinely trending down. If these indicators persist at a high level, it could delay the rate cut decision.
**Wage Pressures and Energy Concerns**
In Germany, wage pressures are gradually easing. Nonetheless, Nagel noted that they could pose challenges if they persist. He also expressed concern about the recent uptick in oil prices, highlighting the volatility of the energy market.
**Other ECB Perspectives**
Several other ECB officials have recently weighed in on interest rate expectations. Mario Centeno, governor of Portugal’s central bank, believes it is “about time” to adjust the monetary policy cycle, citing slowing inflation as a factor. ECB President Christine Lagarde has indicated that the ECB is likely to moderate its policy if disinflation progresses as anticipated.
**Market Expectations and Inflation Targets**
Markets are largely pricing in a rate cut from the ECB in June. Euro zone inflation has slowed to 2.4% in March, providing some optimism for a downward trajectory. The ECB’s objective is to maintain a medium-term inflation rate of 2%.
**Balancing Act: Growth and Inflation**
Austrian central bank Governor Robert Holzmann emphasized that the ECB considers both economic growth and inflation in its decision-making. Geopolitical tensions and their potential impact on energy prices are also factors that could influence the bank’s approach.
**Cautious Optimism and Market Volatility**
While the ECB signals a potential shift in monetary policy, it is important to note that the bank is exercising caution. The persistence of inflation and external factors such as geopolitical events could lead to market volatility and uncertainty.
