The decline in inflation continues and the latest inflation figures confirm this, the head of the IMF’s European department, Alfred Kammer, told the Reuters news agency on Wednesday on the sidelines of the ECB’s central bank forum in Sintra.
“This means that we are sticking to our monetary policy recommendation for the ECB, which says that it should continue to gradually lower the key interest rate.” Inflation in the euro area fell to 2.5 percent in June from 2.6 percent in May. The ECB’s target of 2.0 percent is therefore not far away.
“The data, including the release of inflation figures for June, confirm the outlook and indicate that disinflation is still broadly in line with our expectations,” said Kammer. The ECB therefore has scope to lower its deposit rate to 2.5 percent or a neutral level by the third quarter of 2025.
A neutral interest rate is one that neither drives nor slows down an economy. The deposit rate that banks receive when they park excess funds with the central bank is currently 3.75 percent. The ECB had lowered it from 4.00 percent at the beginning of June. It was the first interest rate cut by the Eurozone central bank since 2019.
The financial market currently assumes that the ECB will lower the key interest rate to 2.75 percent by the third quarter of 2025. The key interest rate at which banks in the euro area can obtain fresh money from the ECB is currently 4.25 percent.
The IMF is therefore expecting faster interest rate hikes. According to Kammer, the labor market is already easing. “We are seeing this in a number of countries, and it indicates that the restrictive monetary policy is dampening overall demand.” Collective wages in the 20-country community have recently risen quite sharply, which is currently seen as one of the main drivers of inflation.