ECB's Knot backs one or two more rate cuts this year

FRANKFURT (Reuters) -European Central Bank policymaker Klaas Knot on Thursday backed market expectations for one or two more interest rate cuts this year as inflation appeared to be headed towards the ECB's 2% target.

The ECB began undoing its steepest ever streak of rate hikes earlier this month but left options open as to what it would do next, also in light of stronger-than-expected inflation and wages data in recent weeks.

Knot stressed inflation was still seen hitting the ECB target next year, even if the road to 2% was likely to be bumpy and services inflation remained high.

"We can continue to slowly but surely lift our foot off the brake," Knot, the Dutch central bank governor, told an event in Milan.

"You could say the score is one-nil – we have taken the lead," he said in a speech peppered with soccer references.

Knot said the "just under three" cuts priced in by financial markets for 2024 were "broadly in line" with the optimal policy path calculated by staff at his central bank.

He reaffirmed his preference for changing policy when the ECB gets updated projections from staff -- that is in September, December, March and June.

Knot said the ECB should in the future "look through small deviations" from its inflation target but only "as long as we respond especially forcefully to larger" ones.

He also proposed publishing "scenarios or confidence bands" around the ECB's projections to outline "different narratives about the evolution of the euro area economy".

"This would require attaching some probability to the alternative inflation scenarios when taking monetary policy decisions," said Knot, the longest-serving member of the ECB's Governing Council.

(Reporting by Francesco CanepaEditing by Kevin Liffey and Peter Graff)