Since last year, the European Central Bank (ECB) has been actively lowering its policy interest rates, but concerns over the U.S.-led trade war have led to discussions about slowing the pace of rate cuts.
Roberto Holzmann, a member of the ECB monetary policy committee and governor of the Austrian Central Bank, noted during a CNBC interview on the 12th (local time) that, due to the tariff threats from U.S. President Donald Trump, "we need to be cautious about (lowering interest rates) because there is a risk of inflation."
Holzmann said, "According to our model, it is true that growth tends to decline when trade friction increases, but conversely, inflation also rises, so we need to be more patient," adding, "In my view, the pace of disinflation is not likely to accelerate." He continued, "Our job is not to support growth but to address inflation," stating that a big cut (a 0.50 percentage point cut to policy rates) is not a good idea.
Isabel Schnabel, a key ECB executive, stated in a speech the previous day in Nuremberg, Germany, that uncertainty in the trade sector has "dramatically" increased and that structural crises, such as high energy prices, cannot be resolved through rate cuts.
As concerns about a recession in the eurozone (20 countries using the euro) have increased, the ECB cut policy interest rates five times from June last year to last month. The key deposit rate, which is a monetary policy benchmark, has dropped from 4.00% to 2.75%.
Market participants have predicted that deposit rates could reach around 2%, which is the estimated neutral rate, as early as this summer. However, as President Trump's tariff threats have materialized, concerns about a resurgence of inflation driven by rising import prices are gaining traction.
Christine Lagarde, the ECB president, also stated during a speech to the European Parliament on the 10th that disinflation is progressing smoothly, but added, "If global trade frictions increase, the inflation outlook for the eurozone will become more uncertain."
According to Bloomberg News, market expectations for an additional rate cut this year were revised down from 88 basis points (1 basis point = 0.01 percentage points) on the 10th to 78 basis points on the day of reporting.