LISBON/HELSINKI (Reuters) – Euro zone key rates are expected to continue to fall due to a significant decline in inflation, while weak economic growth, now threatened by potential new US customs duties, could be the next major problem on the horizon, European Central Bank (ECB) policymakers said on Tuesday.
The ECB has already cut its key rates three times since the start of the year and investors expect further cuts at each of its monetary policy meetings until at least next June, while the Union Europe is once again on the verge of recession.
Mario Centeno, the governor of the Portuguese central bank, stressed on Tuesday that the bloc’s economy was stagnating and that “risks were accumulating”, with the customs duties that US President-elect Donald Trump intends to impose posing a new threat.
Mario Centeno warned the ECB against rate cuts too late, saying that the risk of inflation below the 2% target is increasing.
ECB Vice President Luis de Guindos, meanwhile, said growth was becoming the bank’s main concern and that tariffs risked triggering a vicious cycle of trade wars.
“Concerns about high inflation have shifted to economic growth,” he said in an interview with Finnish newspaper Helsingin Sanomat.
“When you impose tariffs, you have to be prepared for the other side to retaliate, which can trigger a vicious cycle,” he warned.
“Ultimately, this could turn into a trade war, which would be extremely damaging to the global economy,” he added.
This could weaken economic growth, drive up inflation and impact financial stability, in a “lose-lose” situation for everyone, he insisted.
Donald Trump, who said Europe would pay a heavy price for running a trade surplus with the United States for years, pledged Monday to impose significant tariffs on imports from the three most major trading partners of the United States (Canada, Mexico and China), upon taking office in January.
Even if European growth were to suffer from the increase in American customs duties, the impact on inflation might not be so significant, the governor of the French central bank declared on Monday during a conference dedicated to investors in Paris.
“The effect on inflation could be relatively limited in Europe, but long-term interest rates set by the market have a certain tendency to cross the Atlantic,” said François Villeroy de Galhau.
“I don’t think it changes much for European short-term rates, but long-term rates could suffer a transition effect,” he added.
WHERE IS THE NEUTRAL RATE LOCATED?
The governor of the Finnish central bank, Olli Rehn, for his part, warned about economic growth, predicting subdued activity and a barely timid recovery. This could encourage the ECB to lower its key rate to the so-called “neutral” level, the one which no longer slows down economic growth, by the start of spring.
The neutral rate is not a precise number, but most economists place it between 2.0% and 2.5%, well below the ECB’s current deposit rate of 3.25%.
However, this level is unlikely to be the ECB’s final rate, with money markets estimating that the deposit rate will fall to 1.75% in 2025, a level which would boost growth.
“If the United States imposes tariffs on other countries’ products, whether they are 10% or 20%, and everyone reacts, all countries lose,” Olli Rehn said.
“In this situation, the United States would lose the most, because other countries could direct their exports to other countries, while American companies would face the same tariffs everywhere, he added .
(Reporting Sergio Goncalves, Leigh Thomas, Essi Lehto, Balazs Koranyi; written by Andrei Khalip and Balazs Koranyi; Claude Chendjou, edited by Blandine Hénault)
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