By Balazs Koranyi

FRANKFURT (Reuters) – The European Central Bank (ECB) should continue cutting interest rates in small increments, according to Cypriot policymaker Christodoulos Patsalides. He stated there is no need for policy adjustments that would stimulate economic growth.

The ECB has been easing its policy for most of this year. Current discussions center on the pace and extent of further rate cuts as inflation concerns diminish and economic growth remains weak.

Patsalides expressed a preference for gradual adjustments rather than larger cuts, emphasizing the need for caution given the uncertainty in the economic landscape. He stated, "We also don't want to surprise the markets and give the wrong signals."

Some policymakers have suggested a substantial 50 basis point cut, but Patsalides cautioned that such moves should depend on a sustained drop in inflation below the ECB's 2% target, a scenario he does not foresee.

He continued to assert that while interest rates will trend downward, he is reluctant to commit to market expectations of four consecutive cuts in the first half of 2025, noting the potential for market misjudgment.

Regarding economic stimulus, Patsalides indicated that cutting below the neutral rate—between 1.5% and 3% according to his estimates—would suggest an ongoing or anticipated recession, which is not currently reflected in ECB projections. He stated, "I don't see a situation in which rates would go below the neutral rate."

Currently, the ECB's deposit rate stands at 3%, and market predictions forecast a decline to 2% by mid-2025, with a 50% chance of dipping to 1.75% by the end of the year.

In light of the dollar's strengthening, Patsalides noted that it does not pose inflationary threats to the euro zone at the moment. He mentioned that potential trade barriers by the upcoming U.S. administration could have mixed long-term impacts but reiterated that the current exchange rate is not causing direct inflationary issues.