ECB Official Signals Likely Rate Cuts Amid Global Risks

European Central Bank (ECB) official Peter Casimir has indicated that a quarter-point rate cut next week is highly likely, with two to three more reductions likely to follow. In an interview late Monday, Casimir highlighted the near certainty of consecutive quarter-point rate cuts, but also emphasized the importance of remaining flexible due to the uncertainty surrounding the global economy. "Three or four cuts in a row are possible, but at the same time, I have to say that we cannot swear to that," the Slovak ECB official remarked. Casimir, expressing confidence about next week’s rate cut, said, “for me personally, the deal is done.”

His views align with those of many of his colleagues on the ECB’s Governing Council, with economists and traders largely anticipating a similar move. However, while the rate cuts are almost certain, the pace and scale of future reductions remain a point of discussion. Some fear that a weak euro could complicate efforts to manage inflation, while others worry that excessively tight policies could stifle the ongoing deflationary process.

"The ECB is on the ‘right track’ to return inflation to its 2% target, though the job is not yet finished," Casimir said, stressing the importance of balancing cautious and aggressive action. Although wage growth is expected to moderate, which will help ease pressure on service prices, he added, “we need solid evidence that it is working, and that will take some time.”

Casimir also noted the potential risks arising from geopolitical tensions. He pointed out that U.S. economic policies under former President Donald Trump, as well as China’s deflationary actions, could further exacerbate price pressures in the eurozone. "Price pressures are likely to be accompanied by Trump’s economic policy and China’s deflationary actions," he said.

Regarding inflation, the ECB expects it to stabilize around 2% in the coming months and to remain at that level through at least 2027. Casimir expressed confidence in the current path, despite a slight uptick in inflation in December. “The new data justifies a confident continuation of our course – I see no reason to pause – and I also see no reason to talk about a reduction of a different size,” he remarked. He believes that the current rate cut size enables the ECB to maintain momentum while retaining flexibility in response to future uncertainties.

On the subject of U.S. economic policy, Casimir acknowledged the potential inflationary effects of President Trump’s trade threats, including closing U.S. borders and imposing tariffs. These policies, Casimir said, could push domestic inflation higher and lead the U.S. Federal Reserve to maintain higher interest rates, thereby strengthening the dollar. "We depend on the data, not the Fed," he noted, clarifying that while the ECB watches exchange rate movements due to their potential impact on inflation through import prices, it avoids drawing conclusions from short-term fluctuations.

Casimir emphasized that, for the ECB, the "potential negative" economic consequences of Trump’s policies pose more concern than any inflationary pressures, particularly in light of Europe’s already slow economic growth. “Europe’s structural problems are much more significant and painful,” he said, adding that Trump’s economic policies could worsen Europe’s competitiveness challenges.

Finally, Casimir indicated that the ECB's current goal is to remove all constraints on the economy, with the neutral level for interest rates likely to fall somewhere between 2% and 3%, closer to the lower end of that range. Despite this cautious optimism, he cautioned that the ongoing uncertainty requires the ECB to remain adaptable.

By fLEXI tEAM