ECB Sees No Need for Further Rate Cuts as Inflation Meets Target

The Governing Council of the European Central Bank (ECB) has indicated that the current economic conditions do not warrant further interest rate cuts aimed at stimulating growth. The council member from Estonia, who is also the governor of the Estonian Central Bank, stated that the economic situation does not necessitate additional easing measures. The council member emphasized that the ECB has already reduced interest rates eight times since June 2024, and inflation is currently at a level that is "basically in line with the target." This assessment suggests that the ECB can maintain stable borrowing costs during its upcoming meeting later this month.

The council member noted that while economic growth remains sluggish, it is gradually recovering. Therefore, maintaining the current interest rate levels and closely monitoring developments is a reasonable approach. The council member believes that the current low-interest rates are sufficient to support economic recovery without hindering it.

Recent data shows that the eurozone's price increases have accelerated for the first time since June, aligning with the ECB's 2% target. ECB officials anticipate that inflation will stabilize at this level in the medium term after falling below it in 2026. The ECB is also closely monitoring the evolving trade relationship between the EU and the US, as well as the impact of tariffs imposed by the Trump administration on the EU economy. Another factor to consider is whether Brussels officials will implement retaliatory measures.

During the ECB's annual conference in Sintra, Portugal, the council member mentioned that while the specific situation in September is still uncertain, there should be a clearer understanding of the trade dynamics and possibly more insights into fiscal plans. This would allow for a better assessment of the situation.

The council member also highlighted that risks affecting inflation prospects, including potential supply chain disruptions, fiscal spending, and energy price volatility, are "roughly balanced." This is because the economic performance could be worse than currently assumed.

The strength of the euro could pose new challenges for policymakers. Since the beginning of the year, the euro has appreciated by 14% against the US dollar, reaching approximately 1.18. Some officials have warned that the pace of this adjustment needs to be closely monitored. The ECB's vice president has even suggested that if the exchange rate rises above 1.20, the situation could become "more complex."

A strong currency can lower the prices of imported goods and reduce the competitiveness of exports, both of which can have a deflationary effect. However, the council member expressed that the recent changes in the euro's value are not a significant concern. The council member stated that while the euro's appreciation has been rapid, its level remains within historical ranges and does not warrant excessive worry.