European Central Bank (ECB) board member Piero Cipollone has stated that interest rates in the eurozone have room to fall further as inflation moderates while warning that the US-China trade war could significantly impact the 20-member eurozone economy.
The ECB has lowered borrowing costs five times since June, with inflation concerns easing in favor of addressing growth issues. Investors anticipate at least three more rate cuts this year to support an economy still recovering from two years of stagnation. Cipollone noted that there remains scope to reduce rates further, although higher energy prices and global trade tensions complicate the bank’s decision-making process.
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“While the overall fundamentals haven’t changed since December, I expect a gradual decline in rates to align with inflation targets,” Cipollone said, predicting inflation would return to 2% by the summer.
The primary concern, however, is the ongoing trade tension between the US and China, which Cipollone believes could hit Europe hard, even without direct trade barriers. He warned that if President Trump intensifies the trade conflict with China, Europe could be negatively affected. With China holding 35% of the world’s manufacturing capacity, any disruption in US-China trade could lead China to seek alternative markets, potentially flooding Europe with discounted goods, which would hinder growth and suppress prices.
Though the imposition of tariffs could hurt the US economy, Cipollone downplayed the impact of potential tariffs aimed at Europe. He suggested that firms could absorb some of the higher costs, while a weaker euro against the US dollar could mitigate the blow to the region.
Despite the risks, Cipollone expressed confidence that trade tensions would not lead to a recession. He noted resilience in key areas, such as the labor market, consumption, construction, and industry, which are showing signs of recovery after a prolonged downturn. While trade tensions could pressure inflation downward, other factors, particularly energy prices, are expected to push it back up, leaving risks to the ECB’s inflation target balanced.
