FRANKFURT (Reuters) – A weak euro zone economy may drag inflation below the European Central Bank’s 2% target, ECB policymaker Yannis Stournaras said in an interview published on Thursday, reaffirming his expectation for two interest rate cuts this year.
The ECB has faced too high inflation for nearly three years, to which it responded with a long streak of rate hikes that it only recently began to dial back.
Stournaras, the head of the Bank of Greece and one of the doves on the ECB’s Governing Council who favour lower rates, said growth was lower than the central bank expected and so could be inflation.
“The renewed signs of weak economic activity and the high level of uncertainty will very likely dampen inflation more than had been expected,” he told German financial newsletter Platow Brief. “This suggests that there is a risk of inflation falling below the 2% target in the medium term.”
Euro zone inflation for July and growth for the second quarter came in slightly hotter than economists expected this weak but traders still expect the ECB to resume lowering borrowing costs in September or October at the latest as surveys point to slowing activity.
Stournaras backed that expectation although he cautioned this would depend on incoming data, especially on wages, and the ECB’s new economic projections published next month.
“I still expect two rate cuts this year if disinflation continues as expected,” he said. “We are on the right track. In addition, growth is weaker than expected, which also speaks in favour of interest rate cuts.”
