Authors Francesco Canepa and Balazs Koranyi
FRANKFURT (Reuters) – European Central Bank policymakers pushed for further interest rate cuts on Wednesday, signaling that next week’s cut is far from a done deal and that further moves are on the way.
Having already cut rates four times in response to weak growth and falling inflation, the ECB is expected to continue to act quickly in 2025 with traders even increasing their rate cut bets this week after US President Donald Trump failed to announce trade tariffs against the bloc he was so afraid of.
“The direction is very clear,” ECB President Christine Lagarde told CNBC in Davos about interest rates. “The speed we’ll see depends on the data, but a gradual movement is certainly something that comes to mind right now.”
Arguing against faster policy easing, Lagarde said she did not expect the ECB to exceed its 2% inflation target and also had to watch the impact of a weak euro, which could potentially raise the cost of imported goods, including energy.
“It will be an interesting phenomenon that we will observe. The course, for example, will be of interest and may have consequences,” she asserted.
Klaas Knot, the conservative head of Dutch central bank Knot, meanwhile appeared to back rate cuts on January 30 and March 6 in light of “encouraging” economic data.
“I am quite satisfied with the market expectations for the upcoming two meetings and more than that I think it is too early to comment,” the Dutch governor said on Bloomberg TV.
“The data are encouraging, they confirm the broad picture that we will return to the target in the rest of the year and we hope that the economy will finally recover a little,” he said.
But he flagged “risks that will emerge in the medium to long term,” including “the many channels through which his (Trump’s) trade policies could affect the global economy and global inflation outlook.”
Bank of Greece Governor Yannis Stournaras also backed gradual steps, favoring 25 basis point increments and saying the ECB’s 3% deposit rate should move closer to 2% by the end of the year.
Big tariffs from the US would pose a risk to growth and could even force the ECB to act more quickly, Stournaras added.
“Most likely (tariffs) would accelerate the reduction of interest rates, as this would further negatively affect the size of the European economy,” Stournaras was quoted as saying by Greek newspaper Naftemporiki.
Money markets are almost fully pricing in four further ECB cuts this year, leaving the rate the central bank pays on eurozone bank deposits at 2%.
This is near the lower end of the range that ECB economists consider neutral, which neither stimulates nor constrains the economy.
Commenting on the question, Lagarde said that the ECB is trying to pinpoint that neutral level and that it is somewhere between 1.75% and 2.25%.
While some policymakers have raised the prospect of a drop below that level, Knot remained bullish.
“If the recovery continues, if we get closer to the target by mid-year, I’m not convinced yet that we need to go into stimulus mode,” he said. “Again, there’s a range for neutral … which gives us a bit of room. Let’s not get vertical here, the data will tell us where to go.”
