As Mr Šimkus pointed out, the outlook for the interest rate path should coincide with positive market expectations for the September and December Governing Council meetings. „I do not doubt that the tapering issue will be on the table and will be discussed very seriously,“ said Mr Šimkus.
„The data should make it unpleasantly surprising that such a decision would be off the table or unlikely in September,“ he said.
According to the Head of LB, economic indicators point to consistent disinflation, which will be an essential factor in the ECB's decision on interest rate cuts. Moreover, in his view, the markets' positive expectations are easing monetary policy even now, as „the markets see, expect and are already pricing in an easing of interest rates.“
„In September, we will have quite a lot of new information – gross domestic product figures, wage information, and two new inflation figures. It is now essential to monitor inflation, not so much overall inflation. Still, how do net, services, and wage inflation evolve in the second half of the year and towards the end of the year?“ he highlighted.
According to Šimkus, the inflation target for next year is projected to be around 2%. This target rate should be maintained in the second half of 2025. The 2026 forecasts, according to his assessment, already foresee an average annual inflation rate of 1.9%.
„In markets acting very strongly through expectations and expecting a softening, that softening is already very visible. If we compare the six-month EURIBOR now with the peak in the autumn, it has fallen by over 0.5 percentage points,“ Šimkus said.
As the ECB announced on Thursday, key interest rates are unchanged, pending strong evidence that consumer price growth has stabilised sufficiently to allow a return to lower borrowing costs. The bank maintained its current key deposit rate of 3.75%, which it had cut in June for the first time after a prolonged period of rate hikes to contain runaway inflation.
This pause was widely expected after ECB Governing Council President Christine Lagarde said policymakers would need more time to gather sufficient data to decide on the next steps.
The ECB's 0.25 percentage point cut in key interest rates at the beginning of June was accompanied by a reduction in borrowing costs, which had reached record highs. Still, the way forward remained unclear in the face of volatile inflation.
At the time, economists suggested another rate cut could be expected this year. They stressed that the decision was an encouraging signal to the market that had been scheduled for some time.
However, Lagarde said on Thursday that she could not commit to the rate cut expected by the markets in September. According to the ECB Governor, the outcome of the next meeting is „completely open“ and will depend on the latest data.
According to Eurostat, the EU's statistics office, annual inflation in the euro area fell to 2.5% in June from 2.6% in May, while in the EU it dropped to 2.6% from 2.7% in May. In June 2023, the euro area inflation rate was 6.4%.
At the same time, Lithuania's annual inflation rate was 1% in June, up from 0.9% in May.
