ECB at risk of becoming too restrictive, Cipollone says

1:41 am Wednesday, September 04th, 2024

FRANKFURT (Reuters) -The European Central Bank can continue to cut interest rates given the slowdown in inflation, and there is a risk the bank could keep policy too tight, ECB board member Piero Cipollone told a French newspaper.

The ECB cut rates in June from a record high and it is all but certain to ease again on Sept. 12, but the growth outlook has been deteriorating over the summer and policymakers are now debating whether it may have fallen behind the curve.

While Cipollone did not directly call for a September rate cut like many of his colleagues, he argued that inflation remained on the path outlined three months ago, which already assumed policy easing in both September and December.

“The data so far confirms our direction of travel and I hope that they will allow us to continue to be less restrictive,” Cipollone told Le Monde in an interview.

“There is a real risk that our stance could become too restrictive,” Le Monde quoted Cipollone as saying on Wednesday. “We must ensure that inflation converges to our target without holding back the economy unnecessarily.”

Markets have fully priced in at least two more rate cuts this year in September and December, and also see a fair chance for a further move in October, partly on the weak growth outlook and partly on expectations the U.S. Federal Reserve will ease policy quickly, forcing the ECB to follow along.

Cipollone also warned about weak growth, dragged down by anaemic improvement in competitiveness.

“Most recent data – such as consumer confidence and activity indicators, particularly for the manufacturing sector – have not been so encouraging,” he said. “This poses a risk to the euro area growth outlook.”

He argued that investment remains weak, which indicates that firms do not believe in a strong recovery. This will then hurt the bloc’s future growth potential by reducing its capacity to develop and adopt new technologies.

(Reporting by Balazs Koranyi; Editing by Tom Hogue)