The European Central Bank should cut interest rates further to support the emerging economic recovery in the euro zone, and also in the face of possible new trade tariffs in the United States, ECB Governing Council member Piero Cipollone said.
The European Central Bank has cut interest rates three times since June after seeing inflation, which hit double digits following Russia’s invasion of Ukraine in 2022, fall to its 2% target.
Cipollone, an Italian and the most tolerant voice on the ECB’s six-member Governing Council, claimed that lowering borrowing costs would stimulate investment and boost productivity.
“The current balance of risks suggests that we can and should further reduce the current level of monetary policy restrictions,” Cipollone said at an event in Britain. “The pace and extent of this reduction will depend on the incoming data.”
Conversely, keeping interest rates too high and economic growth below potential could be “self-harming” because it “may reduce potential growth and thus weaken the economy’s ability to withstand demand and supply shocks,” Cipollone added.
He did not explicitly mention Donald Trump’s victory in the US presidential election last week, but noted that “the prospect of higher trade tariffs… by the United States may weigh on activity (and) consumer confidence.”
The former Bank of Italy official added: “These developments may in turn put downward pressure on inflation in the euro area. However, these deflationary effects could be offset by a decline in the euro exchange rate and retaliation with tariffs, which would increase the prices of imported goods.”
While Trump’s trade plans remain unclear, some European Central Bank policymakers have said that US protectionist policies would hamper global growth and that blanket trade barriers in response would do more harm than good.
Investors expect the European Central Bank to cut interest rates by a quarter of a percentage point at its next meeting on December 12th, followed by further cuts during the spring. This would bring the interest rate paid by the ECB on bank deposits to a range between 1.75% and 2%. .0% from 3.25% now.
