BofA warns Fed risks policy mistake with early rate cuts
SINTRA, Portugal (Reuters) -The European Central Bank should keep its deposit rate at the current 2% level unless new shocks materially change the inflation outlook, Alfred Kammer, head of the IMF’s European Department, said on Wednesday.
The ECB has cut rates by two percentage points since June 2024 but signalled a pause for this month, even if financial investors still see another cut to 1.75% later this year.
"Risks around euro zone inflation are two-sided," Kammer told Reuters on the sidelines of the ECB Forum on Central Banking in Sintra, Portugal.
"This is why we think the ECB should stay the course and not move away from a 2% deposit rate unless there is a shock that materially changes the inflation outlook. Right now we don’t see anything of such magnitude."
Part of the reason why the IMF is taking a different view than markets is because it anticipates higher inflation next year than the ECB.
The ECB projects price growth falling below its 2% target for 18 months from the third quarter, bottoming out at 1.4% in early 2026.
"For next year, we see inflation at 1.9%, which is above the ECB’s own projections, partly because we take a different view on energy prices,” Kammer said.
While most ECB policymakers see inflation risks balanced, there is an increasing group, including Finland’s Olli Rehn, Belgium’s Pierre Wunsch and Portugal’s Mario Centeno, who have all warned about the risk of inflation falling too low.