ECB Policymakers Line Up Behind Rate Cuts Despite US Uncertainty

The European Central Bank (ECB) is expected to continue its path of interest rate cuts, with policymakers signaling further reductions beyond next week's expected move, Reuters reports. This comes despite some uncertainty surrounding potential US trade tariffs.

Speaking in Davos, ECB President Christine Lagarde emphasized the clear direction of interest rate policy. "The pace we shall see depends on data, but a gradual move is certainly something that comes to mind at the moment," she said. However, she also cautioned against overly rapid cuts, noting the need to monitor the impact on the weak euro and the potential for the bank to undershoot its 2% inflation target.

Several other key policymakers echoed Lagarde's sentiment, with varying degrees of certainty.

French central bank head Francois Villeroy de Galhau suggested that the ECB's current 3% deposit rate could decline rapidly, stating that a rate near 2% by the summer is a plausible scenario. This aligns with market expectations, which currently price in four further rate cuts in 2025, bringing the rate down to 2% by year-end.

Dutch central bank governor Klaas Knot, known for his more conservative stance, also threw his weight behind rate cuts in the near term, citing "encouraging" economic data. He stated his comfort with market expectations for the next two meetings but expressed caution about longer-term prospects, citing potential risks from US trade policy's impact on the global economy.

Greek central bank governor Yannis Stournaras also backed gradual rate cuts, arguing for 25 basis point steps and a rate approaching 2% by the end of the year. He acknowledged that significant US tariffs could accelerate the pace of rate cuts due to the negative impact on the European economy.

The most cautious voice came from Spanish policymaker José Luis Escrivá, who noted that recent economic developments are in line with projections, which themselves were predicated on rate cuts this year. This suggests that he, too, expects further easing.

Despite the general consensus on rate cuts, some policymakers remain wary. Knot, for instance, expressed uncertainty about the need for further stimulative measures if the economy recovers and the inflation target is met by mid-year.

Lagarde acknowledged the ECB's efforts to determine the precise level of the "neutral" rate, which neither stimulates nor restrains the economy. This level, she noted, is currently estimated to be somewhere between 1.75% and 2.25%.