European Central Bank policymaker Gabriel Makhlouf is taking a cautious stance on interest rate cuts, signaling that he is comfortable with just one more cut this year. Despite market expectations for at least two more cuts by December, Makhlouf emphasized the need for more time to gain confidence that inflation is heading towards the ECB’s goal of 2%.
Inflation has been on a downward trend, dropping from 10% in late 2022 to 2.5% last month, prompting investors to anticipate further rate reductions. However, Makhlouf, who is also the governor of Ireland’s central bank, expressed concerns about moving too quickly. While he acknowledged the likelihood of another cut, he believed that two cuts in July would be premature, suggesting a more gradual approach to monetary policy.
The ECB recently began reversing its previous rate hikes, but ECB President Christine Lagarde has emphasized a patient approach to further easing. Makhlouf echoed this sentiment, highlighting the need to monitor data on inflation and services inflation, in particular, which rose by 4.1% for the second consecutive month. He stressed the importance of allowing more time to assess the impact of wage increases on the services sector before making any hasty decisions on interest rates.
While Makhlouf expects interest rates to eventually decrease as the ECB works towards achieving its 2% inflation target, he emphasized the need for success to be sustainable. With wages finally catching up to inflation after lagging behind in previous years, he emphasized the importance of achieving the target in a sustainable manner before considering further rate cuts.
The European Central Bank’s approach to interest rate cuts underlines a commitment to stability and sustainability. Makhlouf’s cautious approach reflects a desire to ensure that any policy decisions are based on solid data and a thorough understanding of the economic landscape. By prioritizing gradual adjustments and careful monitoring of inflation trends, the ECB aims to steer the euro zone towards its inflation target while maintaining financial stability.