A rate cut by the European Central Bank (ECB) next week is practically assured, with the likelihood of additional reductions following soon after, according to Peter Kazimir, a member of the ECB’s Governing Council. In an interview on Monday, Kazimir indicated that recent data supports consecutive quarter-point cuts, though heightened uncertainty suggests the ECB must remain flexible in case circumstances change unexpectedly.
“The possibility of three or even four consecutive cuts is on the table, but it’s important to remain cautious,” Kazimir remarked. He expressed confidence that the ECB’s decision for next week is already settled, stating, “For me personally, the deal is done.”
His comments align with signals from other ECB officials ahead of their upcoming policy meeting in January 2025, with market participants—economists and traders alike—generally expecting the rate cut. However, debate continues within the ECB regarding the pace and extent of future rate reductions.
While some within the Council are wary of the potential inflationary impact of a weakening euro, others are concerned that an overly restrictive policy stance might inadvertently hinder the disinflation process. Kazimir stressed the need for balance, noting that acting with either excessive caution or undue aggression could complicate the situation.
“We must strike a balance between being overly cautious and overly aggressive,” Kazimir stated. He reaffirmed that the ECB is making steady progress toward its 2% inflation target, but acknowledged that the journey is far from complete.
Wage growth is expected to slow further, potentially easing price pressures within the services sector, but Kazimir emphasized the necessity of robust evidence before making conclusions about its long-term effect. “We need clear and reliable evidence that this channel is functioning,” he added.
Kazimir also pointed to the broader risks posed by geopolitics, particularly highlighting the potential inflationary effects of U.S. President Donald Trump’s economic policies, alongside disinflationary pressures originating from China. These global factors could complicate the ECB’s path forward.
Despite a slight increase in inflation in December, Kazimir and other officials have expressed confidence in the ECB’s outlook, with inflation expected to stabilize around 2% over the coming months and continue at that level through at least 2027. Kazimir dismissed any concerns about the recent uptick, stressing that the data supports continued policy action, with no immediate need for a change in approach.
“The data we have supports the continuation of our current strategy,” Kazimir affirmed. “I see no reason to pause, nor do I see the need to adjust the size of our rate cuts. The current approach strikes the right balance, offering the flexibility we need while maintaining momentum.”
As global economic uncertainty continues, Kazimir noted that geopolitical developments, particularly Trump’s potential economic measures such as tariffs, could lead to higher inflation in the U.S. This, in turn, may require the Federal Reserve to maintain higher interest rates, which could have indirect effects on ECB policy. The strengthening of the dollar, as a result of such speculation, adds another layer of complexity to the ECB’s decision-making process.
Kazimir emphasized that the ECB’s current policy is focused on removing economic constraints without overstimulating demand. The neutral rate for the ECB is estimated to lie between 2% and 3%, with Kazimir suggesting it will likely gravitate closer to 2% than to 3%.
“We are data-driven, not influenced by U.S. Federal Reserve policies,” Kazimir reiterated. He stressed that the ECB’s monitoring of exchange rates is important, as currency fluctuations can affect inflation via import prices. However, he cautioned against overreacting to short-term market movements.
Kazimir further expressed concern over the broader structural challenges facing Europe, noting that Trump’s economic policies could exacerbate the continent’s competitiveness problems, with potentially negative long-term consequences.
“The structural issues within Europe are more critical and painful than any temporary effects from U.S. policy,” he said. “Trump’s approach could worsen Europe’s already slow potential growth and competitiveness issues.”
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