ECB accounts show firming case for rate cuts

FRANKFURT (Reuters) - European Central Bank policymakers are increasingly confident that inflation is heading back to their 2% target and the case for interest rate cuts is strengthening, the accounts of the bank's March 6-7 meeting showed on Thursday.

The ECB kept borrowing costs at record highs at the meeting but started to cautiously lay the groundwork to lower them in June, arguing it had made good progress in bringing down inflation, even if risks from wage growth remained worrisome.

"Members expressed increased confidence that inflation was on track to decline sustainably to the 2% inflation target in a timely manner," the ECB said in the accounts of the meeting.

"While it was wise to await incoming data and evidence, the case for considering rate cuts was strengthening."

Data since then has shown a further drop in inflation and a moderation in wage demands while growth indicators are suggesting that a modest recovery may be on the way.

The ECB next meets on April 11 and policymakers are likely to keep the June rate cut in play, especially as many of them have already backed such a move.

But they are unlikely to commit to any subsequent moves even as markets price in 88 basis points of easing, or between three and four cuts this year.

A key uncertainty is whether the U.S. Federal Reserve starts cutting rates this summer.

While the ECB could go it alone, policy divergence may weaken the euro and lead some investors to move portfolio investment across the Atlantic, weakening the impact of ECB cuts.

But the euro zone economy, now in its sixth straight quarter of quasi stagnation, is trailing most other economies and inflation is also clearly heading back to target, bolstering the case for lower rates.

(Reporting by Balazs Koranyi; Editing by Hugh Lawson)