ECB Interest Rates Have Room to Fall, But Trade War Risks Remain

ECB Interest Rates Seen Falling Further as Inflation Moderates and Trade War Risks Loom

European Central Bank (ECB) board member Piero Cipollone believes that interest rates in the eurozone have room to decline further as inflation moderates. However, he also warns that the ongoing trade war between the United States and China could have a negative impact on the 20-member eurozone.

Since June, the ECB has lowered borrowing costs five times in response to growing concerns about economic growth. Investors anticipate at least three more rate cuts in 2025 to stimulate an economy that has struggled to recover from a period of near-stagnation.

"There is still room for adjusting rates downwards," Cipollone said in an interview with Reuters. "We are almost on target, but we are still in restrictive territory."

However, Cipollone emphasizes that higher energy prices and global trade tensions are creating opposing pressures on the ECB, making it premature to commit to a specific move, such as the widely expected rate cut in March.

Despite these concerns, Cipollone maintains that the eurozone economy has not undergone significant changes since December, when the ECB's projections anticipated four rate cuts in 2025.

"The fundamentals haven't changed, so I do not expect a big change in direction," Cipollone said. "This convergence with the inflation target is coherent with a declining interest rate path."

Inflation reached 2.5% in January, and the ECB anticipates a return to its target of 2% sometime this summer after four years of exceeding the target.

Trade War Risks

Cipollone highlights that the U.S. trade policy poses a significant uncertainty, potentially impacting Europe significantly, even in the absence of direct trade barriers against the eurozone.

"What concerns me more is if President Trump engages in a full trade war with China," said Cipollone, who is the newest member of the ECB's board. "This is a more serious threat because China has 35% of the world's manufacturing capacity."

The U.S. imposed a 10% tariff on all Chinese imports this week, prompting China to retaliate. Cipollone warns that limiting access to the U.S. market could force China to seek alternative markets, potentially flooding Europe with discounted products, suppressing growth and prices.

However, Cipollone downplays the potential impact of tariffs specifically targeting Europe. He suggests that businesses could absorb some of the increased costs by reducing profit margins, and the inevitable weakening of the euro against the U.S. dollar would provide a buffer for the eurozone.

While trade tensions could moderate economic growth, Cipollone does not anticipate a recession, given the resilience of other sectors of the economy. He points to a strong labor market, recovering consumption, robust construction activity, the positive effects of rate cuts, and signs of improvement in the industrial sector.

"We might not be booming, but I am not expecting a recession at all," he said.

Even if trade tensions weigh on inflation, other factors, particularly energy costs, could offset this impact, creating a balanced risk outlook, despite concerns among some policymakers that the ECB may undershoot its inflation target.