FRANKFURT (Reuters) – The European Central Bank will keep cutting interest rates and should end policy restriction in the coming months, but looming trade tariffs, which may not even be effective, cloud the outlook, Finnish policymaker Olli Rehn said on Tuesday.
The ECB cut interest rates four times last year to 3% and markets expect another four moves in 2025 as inflation is now largely defeated and as lacklustre growth becomes the currency bloc’s biggest headache.
“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 told a conference in Hong Kong.
Rehn previously estimated the neutral rate, which neither restricts nor stimulates the economy at between 0.2% and 0.8% in inflation-adjusted terms, would imply a 2.2% to 2.8% range for the ECB’s deposit rate if inflation was running at its 2% target.
Markets are betting on the central bank rate hitting the bottom of this range in June and falling below it by the end of the year.
The biggest uncertainty may be the incoming U.S. administration’s trade policies under President-elect Donald Trump, which could increase the cost of doing business.
But Rehn also voiced scepticism about the efficacy of trade barriers, arguing that firms find ways to circumvent them and even a recent decline in direct trade between China and the U.S. was masking such a trend.
“It appears that value chains are simply being re-routed through connector countries like Mexico and Vietnam,” Rehn said. “Tariffs between any two countries, like the US and China, may often be circumvented one way or another.”
“Companies are nimble in moving production to avoid tariffs,” Rehn said. “This kind of adaptation makes economies more resilient, but at the same time, it does add to the costs of doing business.”