By Paul Hannon

The European Central Bank has signalled that it is likely to cut its key interest rate June 6, moving before the U.S. Federal Reserve. But policymakers have been much less clear on the likely path of interest rates during the remainder of 2024.

The eurozone's inflation rate and the pace of wage rises are slowing gradually, paving the way for possible rate cuts after a first reduction in borrowing costs next month, the ECB's chief economist said in an interview published Monday.

The ECB last week released figures showing that wages negotiated by labor unions increased more rapidly in the first three months of this year than in the last three months of 2023. That appeared to be a setback for the central bank, but Philip Lane told the Financial Times that a wider view of wage developments pointed to a continued cooling.

"Looking at the full detail, the overall direction of wages still points to deceleration, which is essential," he said. "So we are a step along this journey."

Lane said that while services prices continue to rise at a rapid pace, there is a downward trend in inflation. That means that further rate cuts are possible after the June move.

"The best way to frame the debate this year is that we still need to be restrictive all year long," Lane said. "But within the zone of restrictiveness we can move down somewhat."

Lane said rate cuts will likely continue into 2025 as inflation settles around the ECB's 2% target.

"Next year, with inflation visibly approaching the target, then making sure the interest rate comes down to a level consistent with that target - that will be a different debate," he said.

By moving ahead of the Fed, the ECB risks a depreciation of the euro that could push prices of imported goods and services higher. But Lane said it would take a big move in the exchange rate to push the inflation rate significantly higher. He also pointed to recent figures on growth as an indication that the divergence in interest rates is likely to be limited.

"There are signs the U.S. economy is slowing down," he said. "In the other direction, there are signs the European economy is starting to grow. So in some sense this stark differential between the U.S. and European economies may narrow over the next year or two."

Write to Paul Hannon at

(END) Dow Jones Newswires

05-27-24 0215ET