Robert Holzmann, European Central Bank (ECB) Governing Council member and Governor of Austria's central bank, said that against the background of an improving inflationary situation, the ECB may begin lowering interest rates at the June meeting. However, Holzmann warned that the ECB should monitor the actions of the Fed, which may also begin easing monetary policy in June.
Over the past year, inflation in the eurozone has declined and economic growth has stalled, leading to discussions about how quickly and how much the ECB can cut rates. Economists expect consumer inflation to remain at 2.6% per annum in March, while core inflation fell to 3.0% per annum. Market participants will closely monitor the CPI report (to be released at 09:00 GMT today) to get an idea of the exact timing of the ECB's initial rate cut. Economic growth looks set to recover in the coming months. In addition, many ECB policymakers have recently expressed a desire to see wage data for the beginning of 2024 before adjusting monetary policy. Earlier this month, ECB President Lagarde noted that policymakers will know more about the prospects for eurozone growth and inflation in June than in April. Moreover, the CPI result, in line with the consensus forecast, will represent a short pause in the recent progress of inflation towards the ECB target. In this context, it is expected that the March inflation data will most likely allow the ECB to stick to the initial rate cut of 25 basis points in June, rather than the earlier April step.
"April is not on my radar. In June, we will have more information," Holzmann said, adding that if the data allows, the ECB will ease monetary policy in June.
"However, if the Fed does not cut rates in June, the market's reaction to the policy divergence will negate most of the benefits of the ECB rate cut, so the ECB should be careful acting alone," Holzmann warned.
Holzmann said that with inflation at 2% and productivity growth of 1%, a deposit rate of 3% could be a "good target." However, this largely depends on whether the eurozone countries can overcome the recent decline in productivity. Markets expect a reduction in the deposit rate to 2% in the long term, but politicians have so far refrained from discussing how policy easing might end.