European Central Bank (ECB) officials signaled on Friday that interest rate cuts may soon reach their limit, though uncertainty in the global economic environment could still shift the policy outlook.
Speaking to CNBC, ECB Governing Council member Martins Kazaks said the central bank is nearing the “terminal rate,” suggesting that only a few more rate cuts may be needed—if any. The ECB has been on an aggressive easing cycle over the past year in an effort to bring inflation back in line with its 2% target.
“We are, by and large, within the baseline scenario,” Kazaks said. “And if the baseline scenario holds, then I think we are relatively close to the terminal rate already.”
Kazaks noted that future policy decisions will depend heavily on global developments, particularly in trade. “A couple more cuts may be possible, but the important thing is to see where the trade talk and the trade story take us,” he added.
His remarks come as internal debate within the ECB intensifies over how much further rates should fall. While some, like Executive Board member Isabel Schnabel, have advocated for caution and a pause in rate changes, others such as French central bank chief François Villeroy de Galhau see room for additional easing.
Markets currently anticipate a high likelihood—around 90%—of another ECB rate cut at the next policy meeting on June 5. However, traders are pricing in only one additional cut for the remainder of the year, suggesting the deposit rate could bottom out at 1.75%.
One major risk hanging over the ECB’s outlook is the possibility of escalating trade tensions. However, Villeroy cautioned against using monetary policy to influence currency movements, dismissing the idea that the ECB might enter into a “currency war.”
“Unfortunately, there is a risk of trade war,” he told regional French newspapers in an interview. “But a currency war would be a situation where each country is actively using its interest rates to try and gain an economic advantage. We are not at that point right now.”
Villeroy said recent currency fluctuations were more likely driven by changes in economic forecasts rather than deliberate policy moves to devalue the euro.
The ECB faces a delicate balancing act as it tries to support growth and maintain price stability while avoiding excessive reliance on rate cuts in a volatile global environment.
