MNI INTERVIEW: ECB Should Stay At 2% If Outlook Holds- Demarco

The European Central Bank should end its easing cycle with interest rates at 2% if its June projections are confirmed by incoming data, acting Bank of Malta Governor Alexander Demarco told MNI on Wednesday.

“I don’t see big reasons to cut another time unless there are some changes. If we see that maybe inflation is going to turn out perhaps lower than expected then maybe another cut will be appropriate,” Demarco said in an interview on the sidelines of the ECB Forum in Sintra.

June inflation data, the quick resolution of the conflict in Iran, and signs that there could be a trade deal between the U.S. and the EU before the July 9 deadline all tend to confirm the outlook in the ECB’s latest projections, though things can still change very quickly, he said.

“I think you'll have to be still watchful.  I don't see anything in the data that really would compel us, you know, to cut at least for a couple of meetings,” he said, adding that he neither sees current monetary settings as restrictive nor the need to enter accommodative territory. (See MNI INTERVIEW: Solid Q2 To Back 1 More Cut- ECB's Centeno)

The ECB should “keep powder dry given the information we have at this moment,” Demarco said, adding that the next round of projections in September will play an important role in determining policy, though a further reduction in the estimate for 2026 inflation will not necessarily translate into an automatic cut.

“Having a slight dip for a small period of time to 1.9% [inflation] is not the end of the world. I think we can tolerate it. It’s not that you have to have 2% all the time. It’s impossible,” he said.

However, he added, there is “the usual elephant in the room,” referring to the July 9 deadline for a tariff deal with the U.S. which could alter the inflation and economic baselines.

EXCHANGE RATE

The euro-U.S. dollar exchange rate, currently at USD1.18, has helped the ECB to reach its inflation target but is still below the average expected, Demarco said, referring to studies that put the equilibrium exchange rate in the range of USD1.20-1.25.

“That is not really a major concern. I mean, for example, in the country where I come from, usually exporters very much voice their concerns when they see the exchange rate appreciated, because a lot of their markets are also outside Europe. So, the exchange rate for that is important.  So far, I have no issues, no complaints from that part”, he said.

“Of course, it's something that we need to watch in the sense of how fast maybe it can go in one direction,” he added, noting however that such a move was more likely to be the result of dollar depreciation than of euro strength.