FRANKFURT (Reuters) – European Central Bank policymaker Klaas Knot on Wednesday backed market bets on interest rate cuts at the ECB’s next two meetings but said the path further ahead was more uncertain, also given a likely new U.S. trade policy under President Donald Trump.
The ECB is expected to continue lowering the cost of borrowing this year as the euro zone economy remains weak and inflation just above its 2% target, with traders even increasing those expectations this week after Trump failed to announce much feared trade tariffs against the bloc.
Knot — traditionally a supporter of a tighter policy stance — appeared to throw his weight behind rate cuts on Jan. 30 and March 6 in light of “encouraging” economic data.
“I’m pretty comfortable with the market expectations for the upcoming two meetings and farther than that I find it’s too early to comment,” the Dutch governor said on Bloomberg TV.
“The data is encouraging, it confirms the broad picture that we will return to target in the remainder of the year and hopefully the economy will also finally recover a bit,” he added.
But he flagged “risks that will play out in the more medium to long term”, including “the great many channels through which his (Trump’s trade) policy might affect the global economy and the global inflation outlook”.
Money markets almost fully price in four further ECB cuts this year, leaving the rate the central bank pays on euro zone banks’ deposits at 2%.
This is near the lower end of a range that ECB economists consider neutral, which is neither stimulating nor restraining the economy.
While some of his colleagues have raised the prospect of going below such level, Knot remained to be convinced.
“If the recovery proceeds, if we approach target by the middle of the year then I’m not convinced yet we need to get into stimulative mode,” he said. “Then again, there’s a range for neutral…that gives us some leeway. Let’s not get head over heels here, the data will tell us where to go.”
