European Central Bank Governing Council Member Rehn: Will continue to cut interest rates, may reach neutral interest rate in the first half of next year

According to Zhitong Finance, Olli Rehn, a member of the European Central Bank's governing council and the Governor of the Bank of Finland, stated that as inflation begins to stabilize around the 2% target, the European Central Bank's interest rates will continue to decline. Rehn reiterated that the deposit rate could reach a neutral level that neither stimulates nor restricts economic activity in the first half of next year. He stated, "The direction of our monetary policy is now clear. The pace and scale of rate cuts will be determined at each meeting based on the latest data and comprehensive analysis."

After four rate cuts of 25 basis points this year, policymakers at the European Central Bank are deciding on the pace and magnitude of rate cuts in 2025. Even after the four rate cuts, the European Central Bank believes that interest rates are still limiting economic activity at current levels. Most officials indicated that policy could gradually shift to a neutral environment that neither restricts nor stimulates growth.

The backdrop of this debate is that the Eurozone economy is struggling to gain growth momentum, with households and businesses reluctant to spend amid rising uncertainty. The European Central Bank's latest forecast shows that economic growth is expected to accelerate to 1.1% next year, while conflicts around the world, the risk of a Trump 2.0, and political turmoil in the United States mean that the economy is likely to weaken.

The challenge is that this threshold is determined by various potential forces, making it difficult to observe in real-time. Lagarde previously mentioned an interest rate range between 1.75% and 2.5%, but ECB Executive Board member Isabel Schnabel said it could be as high as 3%. However, as inflation rates nearly return to target levels, analysts expect the deposit rate to drop from the current 3% to 2% by mid-next year. Investors anticipate that the European Central Bank will adopt a more aggressive easing policy, ultimately settling around 1.75%.

Rehn's remarks echoed the views of Executive Board member Isabel Schnabel. Schnabel stated on Monday evening that as confidence in inflation slowing to 2% increases, interest rates may continue to be lowered. However, she emphasized that further action should be gradual—this is a term used by several policymakers, understood as a 25 basis point rate cut pace.

At the same time, ECB President Lagarde stated that the European Central Bank will further lower interest rates, noting that the risks to the inflation outlook are "two-sided." Just days after the ECB lowered borrowing costs to 3%, Lagarde told reporters that the direction forward is clearly "downward," and the recent move "is not our last rate cut."

Peter Kazimir, the Governor of the Slovak Central Bank, also reiterated on Tuesday that he only supports gradual action by the European Central Bank at the upcoming meeting, stating that he believes inflation risks are currently in a "well-balanced" state. He said, "Once interest rates reach around 2.5%, we will start to seriously consider the issue of neutral rates and whether we should shift from a restrictive policy to a more neutral or accommodative stance."

Although the struggling Eurozone economy is expected to improve slightly in 2025, Rehn still categorized manufacturing as "weak" and warned that global trade uncertainties are hindering the economic outlook. He stated, "Trade and security policies have rarely been as intertwined as they are in Europe right now. What we need least is trade conflicts among allies." Former EU Commissioner Rehn believes that negotiation is the preferred way forward. He stated that the EU's negotiating position "can be strengthened by indicating in advance that if the U.S. threatens Europe with higher tariffs, it is prepared to take countermeasures."