The European Central Bank should pause further interest rate cuts until at least September, one of its most hawkish policymakers has said, warning that “we should keep our powder dry” given the simmering European Union-US trade war.
Austrian central bank governor Robert Holzmann said he saw “no reason” for the European Central Bank to lower rates at its June and July meetings.
“Moving [interest rates] further south would be more risky than staying where we are and waiting until September,” Mr Holzmann said, arguing that a further rate cut at this stage was likely to have “no effect” on economic activity in the euro zone.
Mr Holzmann’s hawkish comments point to disagreement among ECB rate setters, as they weigh how to approach Donald Trump’s trade war ahead of their next meeting on June 5.
The US president last week threatened to impose 50 per cent tariffs on imports from the European Union (EU) from June 1st but has since agreed to delay until July 9th to allow time for talks with the bloc.
Fellow ECB hawk Isabel Schnabel warned earlier this month that the trade conflict could fuel inflation and limit the central bank’s room for manoeuvre.
[ Why ECB’s latest interest rate cut was a no-brainerOpens in new window ]
In contrast, Belgium’s central bank governor Pierre Wunsch – previously also known for his hawkish views – earlier this month called for the ECB to be ready to cut rates to “slightly below” 2 per cent this year.
Both Mr Wunsch and Ms Schnabel spoke before Trump issued his 50 per cent tariff threat on Friday, which marked a significant escalation in the trade feud.
Policymakers in Frankfurt have lowered their key deposit facility rate seven times since last June, bringing it down from 4 per cent to 2.25 per cent at their previous meeting in April.
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Given that euro zone inflation is hovering close to the ECB’s medium-term target of 2 per cent while growth forecasts are bleak, investors and analysts expect another quarter-point cut at the central bank’s June meeting. Markets have also priced in at least one further cut later this year.
Mr Holzmann argued that economic activity in the currency area was being held back by “extreme uncertainty” rather than restrictive monetary policy.
“Key economic decisions by market participants are delayed and not taken. [ … ] People want to wait.” In such a context, a reduction in interest rates would not do much – if anything, he argued.
[ Further ECB rate cut in June all but guaranteedOpens in new window ]
The Austrian central bank governor, whose term will expire later this year, also said that borrowing costs in the euro area have come down so much over the past year that they were no longer slowing down economic activity and were potentially even stimulating growth. He views the “neutral” rate of interest – where borrowing costs are doing neither – at somewhere between 2.5 per cent and 3 per cent.
“Most if not all of the recent estimates on [the neutral rate of interest] for Europe point to quite a strong increase since the beginning of the year 2022. We are already at least at the neutral level.”
Germany’s planned €1 trillion debt-funded spending plans were another reason for the ECB to maintain “a steady hand”, Mr Holzmann said.
If implemented by Germany’s new chancellor, Friedrich Merz, they should boost economic growth in the currency area. Mr Holzmann described Mr Merz’s plan as “a fiscal shock to Europe, which will help us to turn the current development around”.
While Mr Holzmann acknowledged that “many” of the 25 other members of the ECB governing council were “a bit” more dovish than him, he stressed that he did not feel “isolated at all”, arguing that “a number of people” on the decision making body were also “sceptical” about additional interest rate cuts. – Copyright The Financial Times Limited 2025
