Alexander Demarco: Another ECB rate cut likely in April as 2% inflation target nears

The European Central Bank (ECB) is likely to proceed with another interest rate cut in April, as recent projections suggest inflation could reach the two per cent target earlier than expected, according to Alexander Demarco, Acting Governor of the Central Bank of Malta and an alternate member of the ECB’s Governing Council.

Speaking in an interview with Econostream, Mr Demarco highlighted that while uncertainty remains, the ECB’s latest assessments indicate that disinflation is on track. He noted that despite a slight delay in reaching the two per cent target, new projections suggest that price stability could be achieved sooner than initially forecast.

Mr Demarco emphasised that monetary policy decisions will continue to follow a data-dependent, meeting-by-meeting approach. He acknowledged that recent downward revisions in inflation forecasts have been minimal, reinforcing the view that the ECB remains on track to achieve its price stability objectives.

“If nothing were to change, cutting in April could be considered the default,” Mr Demarco stated. However, he cautioned that external factors, such as energy prices and exchange rate fluctuations, remain critical variables that could influence upcoming decisions.

Risks and uncertainties

Despite the optimism surrounding the ECB’s inflation outlook, Mr Demarco acknowledged that significant risks persist. Trade tensions, including the potential for increased tariffs by the US and retaliatory measures by the EU, have introduced new layers of economic uncertainty.

“There is a lot of turbulence surrounding us, and this could have an impact on inflation, especially in the short term,” he noted. Additionally, fluctuations in long-term bond yields and evolving fiscal policies across Eurozone countries could further complicate the economic landscape.

Mr Demarco pointed out that while tightening financial conditions have already impacted sovereign and corporate financing, broader economic trends, including defence spending increases in Europe, could also play a role in shaping future inflationary pressures.

Implications for the market

With inflation expectations fluctuating and financial conditions evolving, the ECB’s stance remains cautious but flexible. Mr Demarco stressed that the central bank’s goal is to strike a balance between ensuring inflation remains under control and supporting economic growth.

He also dismissed concerns that an April rate cut would amplify uncertainty, arguing that if inflation expectations continue to improve, further easing of monetary policy would be justified.

“Looking at bond yields alone is not enough. You have to take a wider perspective,” Mr Demarco remarked when addressing speculation over whether German bond yields at 2.90 per cent or higher could warrant a rate cut.