ECB Warns Europe Could Suffer in US-China Trade War as Rate Cuts Remain on the Table

European Central Bank (ECB) interest rates still have room to decrease as inflation continues to moderate, according to ECB board member Piero Cipollone.

However, he cautioned that the US administration's ongoing trade war with China could have significant negative consequences for the 20-member eurozone.

The ECB has already lowered borrowing costs five times since June, as concerns about economic growth have begun to take precedence over inflation fears. Investors are expecting at least three more rate cuts this year in an effort to revitalize an economy that has struggled to recover from two years of near stagnation.

“We all agree there is still room for adjusting rates downwards,” Cipollone stated in an interview with Reuters. “We are almost on target…(and) we are still in restrictive territory.”

Despite the prospect of further rate cuts, Cipollone noted that global trade tensions and rising energy prices are pulling the ECB in different directions. For this reason, he said it would be unwise to commit to any specific move at this stage, even regarding the widely expected and already priced-in rate cut set for March.

That said, he reaffirmed that the eurozone's economic fundamentals have not shifted significantly since December, when the ECB's forecasts projected four rate cuts in 2025, including one already implemented in a unanimous decision last month.

“The overall understanding of where we are going is there, the fundamentals haven’t changed, so I do not expect a big change in direction,” Cipollone explained. “This convergence with the inflation target is coherent with a declining interest rate path.”

While inflation edged up to 2.5% last month, the ECB anticipates it will return to its 2% target by summer after spending four years above it.

However, Cipollone emphasized that a major source of uncertainty remains US trade policy, which could significantly impact Europe, even before any direct trade restrictions are imposed on the bloc.

“What concerns me more is if President Trump engages in a full trade war with China,” Cipollone warned. “This is a more serious threat because China has 35 per cent of the world’s manufacturing capacity.”

The US recently imposed a 10% tariff on all Chinese imports, prompting Beijing to retaliate with countermeasures. Cipollone cautioned that restricting China’s access to the US market would likely force Beijing to seek alternative markets, potentially flooding Europe with discounted goods, which could suppress both growth and prices.

According to models from the Peterson Institute for International Economics, a Washington-based think tank, while the US would experience an economic slowdown due to the tariffs, it would suffer less than its trade war targets.

Nevertheless, Cipollone seemed to downplay the possible impact of US tariffs directly targeting Europe. He noted that businesses could absorb some of the additional costs by sacrificing profit margins, and the inevitable depreciation of the euro against the US dollar would also help cushion the economic blow.

Although trade tensions could drag down economic growth, Cipollone does not foresee a recession, especially given the resilience of other parts of the economy.

He pointed to several encouraging signs: the labour market remains stable, consumption is likely to recover, construction is performing well, rate cuts are beginning to have an effect, and even the industrial sector—after two years of recession—is showing signs of bottoming out.

“We might not be booming but I am not expecting a recession at all,” he stated.

Even if trade conflicts exert downward pressure on inflation, Cipollone noted that other factors, particularly rising energy costs, are pushing prices in the opposite direction. He suggested that while some policymakers fear the ECB could undershoot its inflation target, the overall risks to the economic outlook remain balanced.

By fLEXI tEAM