(Bloomberg) -- It’s “crystal clear” that European Central Bank interest rates will be reduced further but officials shouldn’t rush the process due to uncertainties including rising trade tensions and global conflicts, according to Vice President Luis de Guindos.
“My impression is that we will continue reducing the restriction of our monetary-policy stance over the next months and quarters,” Guindos told Bloomberg Television on Wednesday. Even so, “you have to be extremely prudent.”
Speaking after the ECB warned in its Financial Stability Review that trade now poses an additional threat to the region’s 20-nation economy, Guindos expressed confidence in meeting the 2% inflation target next year and dismissed talk of undershooting that goal.
At its last rate meeting of the year in less than four weeks, investors expect a fourth reduction since June in borrowing costs. While further easing appears likely in 2025, the pace and extent is open and increasingly controversial among policymakers.
Inflation in October came in exactly on target but may quicken before settling at 2% next year. Highlighting the lingering dangers, data earlier Wednesday showed third-quarter negotiated wages jumped by the most since the euro was introduced in 1999, though analysts see such trends moderating next year.
“If inflation on a durable basis converges to our target, I think that the trajectory of monetary policy is very clear,” Guindos said.
Dovish officials like Italy’s Fabio Panetta and Greece’s Yannis Stournaras called again this week for rapid cuts to support Europe’s struggling economy and avoid inflation dipping beneath 2%. Hawks such as Executive Board member Isabel Schnabel and Bundesbank President Joachim Nagel say ECB easing shouldn’t be rushed.
New staff projections in December for economic growth and inflation will be key in determining which camp prevails. While some policymakers have signaled that the milestone could be reached earlier than expected, the European Commission last week still forecast it only for late 2025.
At the same time, uncertainty about the outlook has increased with the re-election of Donald Trump and the collapse of the German government. Rising global trade tensions are “increasing the likelihood of tail events,” the ECB cautioned in its report.
For Guindos, potential fallout from conflicts in Ukraine and the Middle East as well as US trade and fiscal policies warrant vigilance in Frankfurt.
“You have to be very careful in order to try to avoid making a mistake,” he said.
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