G. Šimkus: interest rates may be cut more than once this year

Asociatyvi nuotr.

Gediminas Šimkus, chairman of the board of the Bank of Lithuania (BoL), says that the European Central Bank (ECB) may cut interest rates several more times this year. If the economic scenario plays out, there will be less need for restrictive monetary policy, he said.

„If the economic development is in line with what is encoded in the forecasts, the vision will come true, which will mean less and less need for a restrictive monetary policy, which is a reduction in interest rates. I will refrain from saying who, how and how much, but by containing inflation, if this comes true, we will have a further reduction in interest rates," Šimkus told reporters on Friday.

„If the economic scenario comes true, I think so (there could be more than one more interest rate cut this year – ELTA)“, – he noted.

G. Šimkus explained that interest rates should continue to be cut by no more than 25 basis points.

„I believe that the situation is such that a calm, consistent implementation of price stability, ensuring that inflation approaches 2% with the end of 2025. From the current position, bigger steps than 25 basis points, I don't see the need for that,– said LB chairman of the board of directors.

„This is a mature decision because there is no longer a need for a restrictive monetary policy on this scale. I am not saying that there is no need for further tight monetary policy, there is a need for it now, inflation has not been defeated," he stressed.

However, the chairman of the BoL board did not go on to assess whether the next interest rate cut would come as early as July.

„I will refrain from making a specific assessment on July. I think that, given that the road is bumpy, let's leave the decision for July," Šimkus said.

ELTA recalls that the ECB on Thursday cut its interest rate for the first time since 2019, while at the same time reducing borrowing costs, which had reached record highs. However, the way forward remains unclear as inflation is volatile.

The key deposit rate was cut by 0.25 percentage points to 3.75 per cent. Interest rates have been on hold since October after an unprecedented series of increases that began in mid-2022 to tame sharply rising consumer prices.

The ECB forecasts that inflation in the euro area will be higher in 2024 and 2025 than previously thought.

Inflation is forecast to reach 2.5% in 2024, up from the previously expected 2.3%. In 2025, it is expected to fall to 2.2%, higher than the previously forecast 2%. Inflation is forecast to reach 1.9% in 2026, unchanged.