ECB could have to chop rates of interest beneath 2%, former hawk says | USAEMALL.com

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The European Central Bank must stand ready to lower borrowing costs to “slightly below” 2 per cent as global trade wars threaten to drag down consumer prices, a top official has said.

“If I look at the economy — the shocks we are confronted with and the uncertainty on growth — it might warrant to be mildly supportive,” Belgium’s central bank governor Pierre Wunsch told the Financial Times in an interview ahead of the ECB’s next meeting on June 5.

This could imply lowering the central bank’s key deposit facility rate to “slightly below 2 per cent”, he said. The ECB has lowered its benchmark interest rate seven times since June from 4 per cent to 2.25 per cent.

Markets currently expect that the ECB will cut borrowing costs by a quarter-point in June and again by the same amount in the second half of the year to bring the deposit facility rate to 1.75 per cent, according to Reuters data. Some economists forecast the cental bank might have to increase rates again in 2026.

Wunsch said he was “not shocked” when he looked at market forecasts. “The way I read them is that, somewhere around the end of 2025, we could be mildly supportive,” he said.

Wunsch’s comments in favour of further cuts mark a stark departure from his relatively hawkish stance in the past. In February he had told the FT the ECB should not “sleepwalk to 2 per cent [interest rates] without thinking about it”.

His remarks also mean that ECB hawk Isabel Schnabel appears to be increasingly isolated among the 26 members of the ECB’s governing council that decide rates. Schnabel argued in a speech in the US on May 9 that global trade wars threatened to push up inflation in the Eurozone, limiting the room for further interest rate cuts.

Explaining his change in view, Wunsch said developments since US President Donald Trump’s sweeping tariffs announcements on April 2 had created clear “downside risks to inflation” in the Euro area, as well as additional threats to economic growth.

Eurozone inflation remained above the ECB’s 2 per cent target at 2.2 per cent in April, although economists said factors such as lower oil prices had yet to feed through to consumer prices.

Wunsch also pointed to the surprise appreciation of the euro against the dollar after so-called liberation day, when Trump announced steep tariffs on most US trading partners — including levies of 20 per cent on nearly all exports from the EU. These “reciprocal tariffs” were lowered to 10 per cent on April 9 for 90 days to allow for negotiations.

The stronger euro meant that imports had become cheaper for European consumers, which could slow down inflation, Wunsch argued. The sharp drop in energy prices since early April and the prospect of cheaper goods from China were likely to have similar effects, he added.

Germany’s new €1 trillion debt-funded spending plans to strengthen its army and public infrastructure won’t offset the drag on inflation from the tariff wars over the short term, Wunsch said.

“Fiscal policy takes time before it becomes supportive,” he said, arguing that the euro area may be exposed to a “negative [economic] shock in the short term” which may be followed by a “positive shock in 2026 and 2027.”

While arguing against an overly hawkish stance, the Belgian central bank governor currently saw no case for a larger, half-point cut in the foreseeable future. Wunsch also stressed that he was currently “not pleading” to lower interest rates below 2 per cent “but I’m open to contemplate this possibility”.

European Commission president Ursula von der Leyen said this month that the EU remained “fully committed to finding negotiated outcomes with the US” but the bloc was preparing for “all possibilities”.

Wunsch warned that even in the UK’s trade deal with the US, Trump’s “reciprocal tariff” was 10 per cent.

“That’s big,” Wunsch said, adding it was likely to lead to “lower growth in the US, potentially higher prices and less efficient value chains”.