BRUSSELS (Reuters) -European Central Bank interest rates are in a "good place" now, despite an expected slowing of inflation, because price growth is likely to return to the ECB's target of 2% over the medium term, ECB's Executive Board Member Isabel Schnabel said.
Schnabel told a seminar the expected slowing of euro zone inflation, which the ECB forecasts at 1.6% in 2026 against 1.9% last month, was a temporary phenomenon, due to energy price base effects and the stronger euro exchange rate.
"Inflation is projected to get below 2% over the short term, and this is to a large extent driven by energy and the exchange rate," Schnabel said. "But we also see that inflation is projected to return to 2% over the medium term."
"Core inflation never really moves away from 2%. And this is why we're actually quite comfortable about that. And when you look at inflation expectations, they're actually standing above 2% if you look at consumers or firms," she said.
The ECB has cut rates eight times over the last year, most recently on June 5, setting the deposit rate at 2%, but some investors expect the bank to make one more cut to 1.75% before the end of the year.
Schnabel, seen as one of the ECB's policy hawks, said that after many years of above-target inflation there was no real concern that inflation expectations could be de-anchored to the downside, below the bank's 2% target.
"That is, for me, a very clear case of looking through temporary deviations of headline inflation from target. So I think in such a situation, where inflation expectations are pretty well anchored, we can look through or can tolerate such moderate deviations from target," she said.
(Reporting by Jan StrupczewskiEditing by Gareth Jones)
