Posted By Uma Rajagopal
Posted on November 16, 2024
FRANKFURT (Reuters) – The European Central Bank should cut interest rates further to support a nascent economic recovery in the euro zone, also in the face of potential new trade tariffs in the United States, ECB board member Piero Cipollone said on Friday.
The ECB has cut interest rates three times since June after seeing inflation, which had hit double digits in the wake of Russia’s invasion of Ukraine in 2022, drop to its 2% target.
Cipollone, an Italian and the most dovish voice on the six-member board that runs the ECB, argued that lowering borrowing costs would stimulate investment and boost productivity.
“The current balance of risks suggests that we can and should reduce further the current level of monetary policy restriction,” Cipollone told an event in Britain. “The pace and extent of this reduction will depend on the incoming data.”
Conversely, keeping rates too high and economic growth below potential could be “self-defeating” because it “could lower potential growth, thereby weakening the economy’s resilience to both demand and supply shocks”, Cipollone added.
He did not explicitly mention Donald Trump’s victory in the U.S. presidential election last week but noted that “the prospect of higher trade tariffs… by the United States could significantly weigh on activity (and) consumer confidence”.
These developments could in turn put downward pressure on euro area inflation,” the former Bank of Italy official added. “However, these disinflationary effects could be countervailed by the depreciation of the euro exchange rate and tariff retaliation, which would increase the prices of imported goods.”
While Trump’s trade plans remain unclear, some ECB policymakers have said protectionist U.S. policies would hamper global growth and blanket trade barriers in retaliation would do more harm than good.
Investors fully expect the ECB to reduce its interest rates by a quarter of a percentage point at its next meeting on Dec. 12, followed by more cuts through the spring. This would leave the rate the ECB pays on bank deposits at 1.75% to 2.0% from 3.25% now.
(Reporting By Francesco Canepa; editing by Balazs Koranyi and Jonathan Oatis)
