ECB Executives Downplay Chances of Further Interest Rate Cuts

ECB executives downplay chances of further interest rate cuts, citing balanced inflation risks and current policy rate being appropriate. ECB chief economist Philip Lane suggests a "slight" reduction in borrowing costs may be considered if there's a higher likelihood of undershooting the target. However, policymakers are divided on the impact of US tariffs and a strong euro on inflation, with some fearing it could push inflation below the ECB's 2% target.

FRANKFURT — European Central Bank (ECB) executives have downplayed the likelihood of further interest rate cuts, citing balanced inflation risks and the current policy rate as appropriate. ECB chief economist Philip Lane, however, suggested a "slight" reduction in borrowing costs if there's a higher likelihood of undershooting the target. The ECB has cut interest rates by 2 percentage points in the year to June but has since been on hold.

In a speech in Frankfurt, Lane noted that shifts in the risk profile of euro zone inflation will impact ECB policy decisions. An increase in the likelihood or intensity of downside risk factors would strengthen the case for a slightly-lower policy rate, he said. Conversely, an increase in the likelihood or intensity of upside risk factors would indicate that maintaining the current policy rate would be appropriate in the near term Rising risk of undershooting would support slight cut in ECB rates, Lane says^[2].

Financial markets currently see almost no chance of another rate cut this year, with ECB Vice President Luis de Guindos also expressing that the current level of interest rates is appropriate based on recent inflation trends. However, policymakers are divided on the impact of US tariffs and a strong euro on inflation. Some fear that the full extent of US tariffs is yet to be felt, and a strong euro could hurt exporters and pull overall inflation below the ECB’s 2% target Rising risk of undershooting would support slight cut in ECB rates, Lane says^[2].

Lane noted that the stronger euro has a multi-year impact on both activity and inflation, with the underlying reasons for the currency movement impacting the extent of the price shock. "These effects will be larger than the average if euro appreciation is more due to external factors, such as weakness in main trading partners or portfolio rebalancing due to an increase in the risk premium in overseas financial markets," he said.

The euro is up 13% on the dollar since the start of the year as investors reduced their dollar holdings due to concerns about erratic U.S. economic policy Rising risk of undershooting would support slight cut in ECB rates, Lane says^[2].