Eurozone interest rates are expected to continue to fall as inflation is now almost under control, but weak economic growth, which could be exacerbated by US trade tariffs, could be a major issue ahead, European Central Bank (ECB) policymakers said on Tuesday.
The ECB has cut interest rates three times this year, and investors expect further cuts at each policy meeting until at least June next year, as the economic bloc once again edges closer to recession.
Portugal’s central bank chief Mario Centeno said the economy was stalling and “risks are on the downside,” with tariffs threatened by US President-elect Donald Trump adding to the risk of a recession.
Centeno warned the ECB not to delay cutting interest rates as the risk of inflation missing its target is growing.
ECB Vice President Luis de Guindos said concerns were now more about economic growth, and tariffs could trigger a vicious cycle of trade wars.
“The concern about high inflation is now shifting to economic growth,” he said. “When you impose tariffs, you have to be prepared for counter-reactions, which can start a vicious cycle,” de Guindos said.
This can weaken growth, increase inflation and affect financial stability in a “win-win situation,” de Guindos added.
Trump, who has said that Europe will pay a high price for years of trade surpluses with the US, pledged this week to impose higher tariffs on his country’s three main trading partners – Canada, Mexico and China – as soon as he takes office.
While European growth has been hit by higher US tariffs, the inflationary impact may not be as large, the head of France’s central bank told a retail investors’ conference in Paris.
“The inflationary impact may be relatively limited in Europe, but market-determined long-term interest rates tend to be affected by developments across the Atlantic,” Francois Villeroy de Galhau said.
The ECB’s rate is not expected to stop at neutral, with markets predicting the deposit rate will fall to 1.75% next year, a level that would stimulate growth.
“If the US imposes tariffs on other countries’ products, whether 10% or 20%, and all countries retaliate, all countries will lose,” Rehn said. “In this situation, the US will suffer the most because other countries can direct their exports to other markets while US companies will face the same tariffs everywhere.”
