ECB Official: January-March Rate Cuts Reasonable, Beyond Unclear

Klaas Knot, a member of the European Central Bank's Governing Council, has stated that investor expectations for interest rate reductions in January and March are justified. However, he emphasizes the difficulty in committing to further cuts beyond that timeframe due to heightened global uncertainty.

With inflation projected to align with the 2% target in the coming months, officials are poised to reduce borrowing costs by a quarter-point next week, following four similar reductions in 2024. Market analysts anticipate a deposit rate near 2% by mid-year, a level considered neither restrictive nor supportive for economic growth.

Knot highlighted the potential impact of punitive tariffs on growth, considering the already subdued consumer spending. He views US trade policy as a "clear downside risk on the horizon."

Despite these concerns, he remains confident in the ECB's ability to bring inflation back to 2%. "The data is encouraging," Knot said, "confirming our expectation of reaching the target by the end of the year, with the economy likely to recover gradually. There is no substantial reason for consumers to be hesitant about spending within the eurozone."

Knot joins a group of ECB policymakers attending the World Economic Forum. President Christine Lagarde is scheduled to address European competitiveness later on Wednesday. Francois Villeroy de Galhau, Knot's French counterpart, previously indicated a "plausible consensus" among the 26-member Governing Council to cut rates at upcoming meetings, downplaying the need for larger increments.

Peter Kazimir, governor of the Slovak central bank, echoed these sentiments, suggesting that three to four consecutive cuts, including one next week, are on the horizon. Bundesbank President Joachim Nagel separately stated that policy could ease towards neutral levels by mid-2025.

Knot concurred, expressing that the ECB is "on a trajectory toward neutral," without providing a specific estimate. He added, "I'm not yet convinced that we need to adopt a stimulative stance."

The ECB will continue to rely on incoming data, including at the upcoming decision, the first of 2025, to guide its actions. "The data will inform our path," Knot said. "Assuming the incoming data aligns with our projected return to target inflation later this year, I see no significant obstacle to an additional rate cut. A change of mind for next week is highly improbable."