EUROPEAN Central Bank policymakers lined up behind further interest rate cuts on Wednesday (Jan 22), indicating that next week’s reduction is all but a done deal and further moves will also come.
Having cut rates four times already in response to weak growth and falling inflation, the ECB is expected to keep moving quickly in 2025 with traders even increasing rate cut bets this week after US President Donald Trump did not announce much feared trade tariffs against the bloc.
“The direction is very clear,” ECB president Christine Lagarde told CNBC in Davos about interest rates. “The pace we shall see depends on data, but gradual move is certainly something that comes to mind at the moment.”
Making the case against more rapid policy easing, Lagarde said she did not anticipate the ECB would undershoot its 2 per cent inflation target and it also needed to watch the impact of the weak euro, which could potentially push up the cost of imported goods, including energy.
“There will be interesting phenomenon that we will watch. The exchange rate, for instance, will be of interest and may have consequences,” she argued.
Klaas Knot, the conservative head of the Dutch central bank Knot meanwhile appeared to throw his weight behind rate cuts on Jan 30 and Mar 6 in light of “encouraging” economic data.
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“I’m pretty comfortable with the market expectations for the upcoming two meetings and farther than that I find it’s too early to comment,” the Dutch governor said on Bloomberg TV.
“The data is encouraging, it confirms the broad picture that we will return to target in the remainder of the year and hopefully the economy will also finally recover a bit,” he said.
But he flagged “risks that will play out in the more medium to long term”, including “the great many channels through which his (Trump’s trade) policy might affect the global economy and the global inflation outlook”.
Bank of Greece governor Yannis Stournaras also backed gradual moves, making the case for 25 basis point steps and said the ECB’s 3 per cent deposit rate should approach 2 per cent by the end of the year.
Big tariffs from the US would pose a risk to growth and could even force the ECB to move quicker, Stournaras added.
“It is most likely that (tariffs) would accelerate the reduction in interest rates, since it would further negatively affect the size of the European economy,” Greek newspaper Naftemporiki quoted Stournaras as saying.
Money markets almost fully price in four further ECB cuts this year, leaving the rate the central bank pays on eurozone banks’ deposits at 2 per cent.
This is near the lower end of a range that ECB economists consider neutral, which is neither stimulating nor restraining the economy.
Commenting on the question, Lagarde said the ECB was trying to pinpoint this neutral level and it was anywhere between 1.75 per cent and 2.25 per cent.
While some policymakers have raised the prospect of going below such level, Knot remained to be convinced.
“If the recovery proceeds, if we approach target by the middle of the year then I’m not convinced yet we need to get into stimulative mode,” he said. “Then again, there’s a range for neutral … that gives us some leeway. Let’s not get head over heels here, the data will tell us where to go.” REUTERS
