JACKSON HOLE, Wyoming (Reuters)

The European Central Bank (ECB) has the capacity to cut interest rates potentially twice more this year, as inflation is decreasing as anticipated, according to ECB policymaker Martins Kazaks.

The ECB first reduced rates in June after a series of hikes, with markets predicting another cut on September 12 due to sluggish economic growth and easing wage pressures. This trend supports the notion that inflation will return to the 2% target next year.

When asked if he supports a cut in September, Kazaks indicated that inflation aligns with ECB expectations, maintaining the case for gradual policy easing. He emphasized, “We are broadly along the baseline of our projections and that is consistent with a gradual decline in interest rates.”

Kazaks, Latvia’s central bank governor, noted that the June projections included two additional rate cuts this year, and he sees no reason not to proceed. However, he will evaluate September’s rate move only after reviewing August inflation data and new ECB projections.

Despite recent inflation surprises, Kazaks cautioned against overemphasizing isolated figures. He asserted that overall economic trends indicate reducing price pressures, which should lead to lower inflation rates.

“Our projections already assumed relatively quick wage growth, and recent numbers show easing wage pressures, supporting a gradual easing path,” he stated, also mentioning declining corporate profit margins.

Wage growth, a critical indicator for the ECB, slowed to 3.6% in Q2 from 4.7% in Q1, strengthening the case for a September rate reduction.

However, Kazaks stressed that the ECB should not allow any further delays in reaching its inflation target, referencing existing postponements.

“I will become concerned if our projections show that getting back to the 2% target is pushed out into 2026,” he said, noting that they now expect to achieve it by the end of 2025 and that timelines have already been extended sufficiently.