The European Central Bank (ECB) may need to cut interest rates again in September due to the persistent weakness of the European economy, stated the governor of the Finnish central bank Olli Rehn. In June, the ECB was among the first major central banks in the world to cut interest rates, but it kept them at existing levels in July and did not provide guidance on its future actions.
With increasing indicators related to price movements and the health of the European economy, Rehn is the first from the 26-member ECB Governing Council to provide his assessment of the direction to follow.
– The recent strengthening of negative risks to growth in the euro area has strengthened the arguments for a rate cut at the next monetary meeting of the ECB in September, provided that disinflation is indeed on the right track – said Rehn in a speech before the European-American Chamber of Commerce in New York on Monday evening.
Markets estimate that there is a 90 percent chance of a cut in the deposit rate by 25 basis points to 3.5 percent in September, and expect at least one more such move before the end of the year.
Rehn asserted that the long-awaited recovery of the eurozone economy is not guaranteed in itself and that policymakers need to be prepared for different outcomes.
– The bad news relates to growth prospects: there are no clear signs of recovery in the manufacturing sector. We must also consider that the slowdown in industrial production may not be as temporary as assumed – Rehn believes. Rehn is more optimistic regarding inflation but warned that returning the targeted inflation rate to two percent annually will not be easy.
