The European Central Bank (ECB) still has room to lower interest rates further as inflation continues to moderate, according to ECB board member Piero Cipollone. However, he also cautioned that escalating trade tensions between the U.S. and China could have significant repercussions for the eurozone economy.
Since June, the ECB has reduced borrowing costs five times, shifting its focus from inflation control to boosting economic growth. Investors are now anticipating at least three more rate cuts this year to help the eurozone recover from nearly two years of stagnation.
“We all agree that there is still room for adjusting rates downward,” Cipollone said in an interview with Reuters. “We are almost on target… but still in restrictive territory.”
While financial markets have already priced in a widely expected rate cut in March, Cipollone emphasized the need for caution. With rising energy prices and ongoing global trade tensions, the ECB must remain flexible and avoid committing to specific moves prematurely.
Despite these uncertainties, Cipollone reassured that the overall economic outlook remains consistent with previous projections.
The ECB’s December forecast included four rate cuts in 2025, and the fundamental economic landscape has not changed significantly since then. “The convergence with our inflation target aligns with a declining interest rate path,” he added.
Inflation edged up slightly to 2.5% last month, but the ECB expects it to return to its 2% target by this summer, following four years of being above that level.
The challenge, however, lies in balancing inflation risks. While global trade tensions could drive prices lower, energy costs remain a counteracting force, keeping inflation risks balanced.
One of the biggest uncertainties for the eurozone is the direction of U.S. trade policy which recently imposed a 10% tariff on all Chinese imports, prompting retaliatory measures from Beijing. While Cipollone downplayed the impact of potential U.S. tariffs on Europe, he warned that a full-scale trade war between the U.S. and China could have severe consequences.
“If President Trump engages in a full trade war with China, that would be a much more serious threat,” he noted. “China controls 35% of global manufacturing, and if it loses access to the U.S. market, it may flood Europe with discounted goods, impacting both growth and prices.”
Economic models from the Washington-based Peterson Institute for International Economics suggest that while the U.S. itself would experience slower growth due to tariffs, the impact on its trading partners—including China and Europe—could be even greater.
Despite these risks, Cipollone remains cautiously optimistic about the eurozone’s resilience. While trade tensions may dampen growth, he does not expect them to push the region into a recession. “We might not be experiencing a boom, but I do not foresee a recession at all,” Cipollone concluded.
REUTERS