European Central Bank Rate Cuts Less Necessary as Inflation Target Nears

Key Features:

* Interest rate cuts less necessary as inflation target is in sight.
* Downside inflation risks outweigh upside risks.
* ECB considering pace of rate cuts after quarter-point move in March.

Content:

The European Central Bank (ECB) can reduce interest rates more gradually as inflation approaches its 2% target, according to Governing Council member Fabio Panetta.

Despite inflation reaching 2.5% in January, Panetta believes that it will sustainably return to 2% by 2025. While some officials express concerns about upside risks from energy costs and trade tariffs, he emphasizes more significant downside risks associated with weak economic activity and rising long-term yields.

Panetta notes that borrowing costs are nearing a neutral level, neither restricting nor stimulating the economy. He also emphasizes that despite Italy's economic slowdown last year, the Bank of Italy expects growth to resume in the coming months.

The ECB is facing a balancing act between lowering borrowing costs to support growth and preventing excessively low inflation. Investors anticipate further rate cuts, but the pace remains uncertain after the anticipated quarter-point reduction in March.