ECB plans to exit restrictive monetary policy by midsummer says Ollie Rehn

The European Central Bank (ECB) plans to continue lowering interest rates and expects to exit restrictive monetary policy in the coming months, likely by midsummer, according to Finnish policymaker Olli Rehn. However, uncertainties surrounding potential U.S. trade tariffs under President-elect Donald Trump could complicate the economic outlook.

Rehn noted that monetary policy is expected to transition out of restrictive territory soon, with the neutral rate, adjusted for inflation, estimated at 0.2% to 0.8%. This places the ECB’s deposit rate in a target range of 2.2% to 2.8% if inflation aligns with the 2% goal. Markets predict rates will reach the lower end of this range by June and drop further by year-end.

• “In light of the current economic outlook and our reaction functions, I would assume that our monetary policy will leave restrictive territory in the coming months, at the latest by midsummer,”

Rehn highlighted the uncertainty surrounding the new U.S. administration’s trade policies, which could raise business costs. Despite skepticism about the effectiveness of trade barriers, he pointed out that companies often circumvent tariffs by rerouting supply chains through intermediary countries like Mexico and Vietnam. While these adaptations enhance economic resilience, they also increase operational costs. Rehn emphasized that businesses are adept at adjusting production to avoid tariffs, underscoring the limited impact of such policies.

Finland’s central bank chief, and ECB policy maker Olli Rehn:

The context for Rehn’s comments is that in 2024 the ECB reduced rates four times to 3%, and that markets anticipate another four rate cuts in 2025, as inflation has largely been brought under control and slow growth has become the eurozone’s primary challenge.

This article was written by Eamonn Sheridan at www.forexlive.com.