Euro zone interest rates will continue to fall as inflation is largely defeated and weak economic growth, potentially exacerbated by US trade tariffs, may be the next big problem on the horizon, officials said on Tuesday. monetary policy of the European Central Bank (ECB).
The ECB has already cut interest rates three times this year and investors expect further cuts at each policy meeting until at least next June, at a time when the eurozone is once again on the verge of recession.
Bank of Portugal Governor Mário Centeno said the economy was stagnant and “risks are accumulating to the downside”, with tariffs threatened by incoming US President Donald Trump as an additional downside risk. .
Centeno warned the ECB not to leave rate cuts too late because it was increasing the risk of inflation missing the target.
For his part, ECB Vice President Luis de Guindos said growth was becoming the bank’s main concern and that tariffs risked triggering a vicious cycle of trade wars. “Concern about high inflation has been transferred to economic growth,” he said to the Finnish newspaper Helsingin Sanomat.
“When you impose tariffs, you have to be prepared for the other side to retaliate, which can start a vicious cycle,” De Guindos said. “Eventually, this could turn into a trade war, which would be extremely detrimental to the global economy.”
This could weaken growth, push up inflation and impact financial stability in a “lose-lose” situation for everyone, De Guindos said.
Trump, who has said Europe will pay a high price for having run a trade surplus with the United States for years, promised this week to impose large tariffs on his country’s three main trading partners, Canada, Mexico and China, as soon as he takes office. post.
Even if European growth were to suffer from rising US tariffs, the impact on inflation might not be that great, the governor of the Bank of France told a retail investor conference in Paris.
“The inflationary effect could be relatively limited in Europe, however 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 will change much for European short-term rates, but long-term rates could see a transition effect.”
Bank of Finland Governor Olli Rehn added his own warning about growth, forecasting moderate activity and only a tepid recovery, which could lead the ECB to lower its official interest rate to the so-called neutral level—which is no longer possible. restricts economic growth—in early spring.
Although the neutral rate is not an exact figure, most economists place it between 2% and 2.5%, well below the current 3.25% ECB deposit facility rate, which is now take as a reference.
However, ECB rates are unlikely to stop at the neutral rate as money markets bet on the deposit rate falling to 1.75% next year, a level that would stimulate growth.
“If the United States imposes tariffs on other countries’ products, whether they are 10% or 20%, and everyone responds, every country loses,” Rehn said. “In this situation, the United States would lose the most, because other countries could direct their exports elsewhere, while American companies would face the same tariffs everywhere.”
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