SINTRA, Portugal (Reuters)

The European Central Bank (ECB) should maintain its deposit rate at the current 2% unless new shocks significantly alter the inflation outlook, according to Alfred Kammer, head of the IMF’s European Department, speaking on Wednesday.

The ECB has reduced rates by two percentage points since June 2024 but indicated a pause for this month, while financial investors anticipate another cut to 1.75% later this year.

“Risks around euro zone inflation are two-sided,” Kammer told Reuters at the ECB Forum on Central Banking in Sintra, Portugal. “This is why we think the ECB should stay the course and not move away from a 2% deposit rate unless there is a shock that materially changes the inflation outlook. Right now we don’t see anything of such magnitude.”

The IMF’s outlook differs from market expectations, predicting higher inflation next year than the ECB. The ECB anticipates price growth falling below its 2% target for 18 months starting from the third quarter, with a low of 1.4% in early 2026.

“For next year, we see inflation at 1.9%, which is above the ECB’s own projections, partly because we take a different view on energy prices,” Kammer added.

While most ECB policymakers perceive inflation risks as balanced, there is a growing faction, including Finland’s Olli Rehn, Belgium’s Pierre Wunsch, and Portugal’s Mario Centeno, who have expressed concerns about inflation potentially falling too low.