ECB policymakers back more rate cuts as inflation heads back to goal

FRANKFURT (Reuters) -Two European Central Bank policymakers on Friday backed further interest rate cuts, expressing greater confidence that inflation was heading to the ECB's goal next year.

The ECB held rates steady on Thursday and its president, Christine Lagarde, said its next decision on Sept. 12 was "wide open" -- stopping well short of declaring victory over the bout of high inflation that followed the COVID-19 pandemic.

However, French governor Francois Villeroy de Galhau and his Lithuanian colleague Gediminas Simkus were more explicit on Friday, backing market expectations for two more rate cuts this year, in September and December.

"Market expectations for the path of interest rates seem rather reasonable to me at the moment," Villeroy said in an interview on French radio BFM Business.

Simkus went further, telling a press briefing in Vilnius that rates would "keep getting lower, and quite significantly" to the tune of one percentage point per year.

This is line with money-markets pricing for the rate that the ECB pays on bank deposits to fall from 3.75% currently to 2.5% by the end of next year.

Both governors have long been clamouring for more rate reductions but sources have told Reuters that even some of the more hawkish policymakers were open to a cut in September, provided incoming data confirmed ongoing disinflation.

Simkus and Villeroy stood by the ECB's forecast, published last month, that inflation in the euro zone would fall from 2.5% currently to the 2% target in the second half of next year.

"I'm even going to say this morning that, barring any shocks, this is more than a forecast, it's a commitment," Villeroy said.

Policymakers will have been comforted by ECB surveys showing that companies were expecting only moderate price hikes and economists were forecasting continuously slowing inflation.

"Contacts reported moderate price growth overall and expected this to continue in the following quarter, with price growth still stronger in services than in industry," the ECB said after surveying 62 large companies in the euro area.

Finnish central bank governor Olli Rehn even worried about a prolonged industrial downturn that continues even after the end of a spike in energy prices that followed Russia's invasion of Ukraine.

"If industry and investments in the euro area do not start to recover soon and growth depends on services, then even the predicted pick-up in productivity growth may be at stake," he said in a blog post. "We must also take into account the possibility that the slowdown in industrial production is not as temporary and cyclical as has been assumed."

(Reporting by Mathieu Rosemain in Paris, Andrius Sytas in Vilnius and Balazs Koranyi in Frankfurt; Writing by Francesco Canepa in Frankfurt; Editing by Dominique Vidalon, Christina Fincher and Susan Fenton)