ECB Interest Rate Cuts and Trade Policy

FRANKFURT (Reuters) – The European Central Bank (ECB) is poised to continue cutting interest rates and may conclude its policy restrictions in the coming months, according to Finnish policymaker Olli Rehn. He expressed concerns about impending trade tariffs, which may not effectively impact the economy.

The ECB reduced interest rates four times last year to a current rate of 3%. Market predictions suggest an additional four cuts in 2025 as inflation is largely managed and sluggish growth remains a significant concern for the currency bloc.

“In light of the current economic outlook and our reaction functions, I would assume that our monetary policy will leave restrictive territory in the coming months, at the latest by midsummer,” Rehn remarked during a conference in Hong Kong.

Previously, Rehn estimated the neutral rate—neither stimulating nor restricting the economy—at between 0.2% and 0.8% in inflation-adjusted terms. This indicates a potential range of 2.2% to 2.8% for the ECB’s deposit rate if inflation meets its 2% target. Market forecasts suggest the central bank rate could hit the lower end of this range by June and potentially dip below by year-end.

A significant uncertainty looms regarding the trade policies of the incoming U.S. administration under President-elect Donald Trump, which might elevate business costs. However, Rehn expressed skepticism about the effectiveness of trade barriers, stating that businesses often find ways to evade them. He noted a recent decline in direct trade between China and the U.S. may obscure ongoing trends of rerouting supply chains through countries like Mexico and Vietnam.

“Tariffs between any two countries, like the US and China, may often be circumvented one way or another,” he said. Furthermore, he highlighted the adaptability of companies in shifting production to dodge tariffs, which, while enhancing economic resilience, also raises business costs.