ECB's Schnabel keeps door open to further rate cuts

TALLINN (Reuters) -Euro zone inflation is falling as predicted, easing the risk that further rate cuts would derail disinflation, European Central Bank board member Isabel Schnabel said on Friday, cautioning that risks to the outlook still remain.

The ECB is widely expected to cut interest rates again next month given easing price pressures, and Schnabel's comments are likely to bolster those bets since the bank's "baseline" already assumed two more rate cuts this year after June's initial cut.

"Recent data remain consistent with the baseline scenario that foresees that inflation will sustainably fall back to our 2% target by the end of 2025," Schnabel told a lecture in Tallinn, Estonia.

While Schnabel did not directly argue for policy easing, she said further gradual rate cuts might not derail the disinflation process as some policymaker had feared.

"Along with signs of a potential decline in economic momentum in other parts of the world, there is less risk that a further moderate and gradual dialling back of policy restraint could derail the path back to price stability," Schnabel added.

Still, Schnabel, an influential voice among the more hawkish policymakers who drove the ECB's steepest ever streak of interest rate hikes in 2022-23, said inflation could evolve quite differently, particularly if wage growth fails to moderate as expected at present.

"Although surveys suggest weaker wage growth ahead, the staggered nature of wage negotiations implies that workers may take longer than projected to recoup their purchasing power," Schnabel added.

Wage growth could also remain high because the labour market is still tight and an imbalance between labour supply and demand could challenge the ECB's assumption that wage growth is merely a reflection of a catch-up process after inflation eroded workers' buying power.

The long-expected rebound in productivity also seems to be delayed and poor productivity growth, which may be exacerbated by trade tensions, could also pressure wages, Schnabel added.

(Reporting by Balazs Koranyi;Editing by Helen Popper)