ECB hopeful euro zone inflation can hit 2% target mid-2025, de Cos says

LONDON (Reuters) -The European Central Bank is growing increasingly confident that euro zone inflation can drop to its 2% target by the middle of 2025 after a choppy few months between now and then, Spanish policymaker Pablo Hernandez de Cos said on Wednesday.

Annual inflation held steady at 2.4% last month but high services costs have raised the risk that the "last mile" of disinflation could be more difficult than the ECB had hoped, and that further rate cuts may have to be delayed.

"Energy base effects, the unwinding of crisis-related fiscal measures and the relatively slow moderation of services inflation, will cause inflation rates to fluctuate during 2024, before reaching our 2% target in mid-2025," de Cos, Spain's central bank governor, said on Wednesday in London.

"We are increasingly confident that we are on the right track to achieve our 2% inflation target relatively soon," he said, echoing the words of Dutch central bank chief Klaas Knot, another influential voice on the 26-member Governing Council.

De Cos also dismissed worries about the most recent inflation reading, calling the deviation from expectations "very minimal". He said the ECB was gaining confidence in its own projections given that errors have been so small in recent quarters.

The ECB has all but promised a rate cut on June 6 but has kept its options open for subsequent moves, even if policymakers clearly favour more cuts.

Markets have fully priced in just two rate cuts for this year, a big change compared to two months ago when more than four moves were expected.

The change comes after investors scaled back their bet on policy easing by the U.S. Federal Reserve, which on Wednesday said rate cuts could only come if it gained greater confidence about price trends.

Although many ECB policymakers argue that higher energy prices, geopolitical tensions and stubborn services inflation also pose a risk to euro zone inflation, de Cos said he considered risks to the outlook to be balanced.

(Reporting by Dhara Ranasinghe and Nell Mackenzie, Writing by Balazs Koranyi; Editing by Toby Chopra and Nick Macfie)