Transcript: Interview with ECB Governing Council member Šimkus on 01 September 2025

2 September 2025

By David Barwick – VILNIUS (Econostream) - Following is the full transcript of the interview conducted by Econostream on 01 September 2025 with Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania and member of the Governing Council of the European Central Bank:

Q: Governor, how you see the outlook for the euro area economy, especially given the trade deal?

A: The outlook hasn’t changed significantly. We’re more or less in the same world as a couple of months ago. The effective tariff on European goods of about 15% is a bit higher than in our June projections, but the difference is not big. As for inflation, we are firmly in the vicinity of 2%, and medium-to-longer term expectations are anchored at 2%. Domestic inflation is a little higher but declining. The economy is a half-full glass. Growth is very slow. Some people see it returning to potential. Others, like me, are more inclined to see downside risks. Growth slowed quite substantially in 2Q compared to 1Q, coming in a bit below our projections. Overall, I continue to think that risks to the economy and to inflation are still tilted to the downside.

Q: And when you say that the situation has not changed much, you're also implying that there should be no need for major revisions to the September projections.

A: Right. But we might see somewhat slower GDP growth and potentially a marginal revision of inflation, because there are many forces now at work that point to lower future inflation.

Q: Given this, how do you feel about where monetary policy is right now?

A: Our current stance very much fits the situation. It strikes a careful balance between consolidating the disinflation process and avoiding undue tightening that would needlessly hurt activity. But as I said, it is important to note that a lot of forces are currently working in the direction of lower inflation. This means that we need to be very open-minded and to monitor developments very carefully. Our meeting-by-meeting, data-dependent approach is appropriate for this.

Q: So, in the very near term, there is no need to change anything.

A: Exactly.

Q: Are interest rates thus neutral at the present 2% level?

A: There is a certain range of rates that are neutral, and I think that we are now in this range.

Q: And can you imagine anything that would lead you to want to cut again already next week?

A: No, not in September. As I said, our current monetary policy stance fits the situation. But let’s look at some of the forces that point to potentially lower future inflation. First, geopolitical tensions are a major source of uncertainty that clearly exert downward pressure on consumption and investment, which means weaker economic developments and potentially less inflationary pressures. Then, tariffs could lead Asian countries to look for new export markets in Europe, which would clearly tend to lower prices. And third, the euro has appreciated. Of course, we are not targeting the exchange rate, but a stronger euro makes our exports more expensive and our imports cheaper, further dampening inflationary pressures. So, our monetary policy stance fits the moment well in September, but I would not be surprised if Santa Claus comes with scissors – but just for snipping, not for slashing.

Q: Suggesting that from today's perspective, the pause should continue only until the end of the year.

A: I’m less focussed on a specific timing than on the general time span starting after September’s meeting. And given everything I've said about the economic and inflation environment, there is clearly more room to ease further than there is to tighten.

Q: But is easing more likely than doing nothing? Nobody's talking about hiking.

A: Probably it is, but the current context is full of uncertainties. I mentioned several sources earlier; we call them risks, but in a way, they are already materializing. And let me add that the return to 2% inflation in 2027 depends on the emissions trading system ETS2, which we assume will add 0.3p to inflation. This, too, is uncertain. So, I think of our easing as carefully descending a staircase step by step. We are not in an elevator that automatically follows a steady path down.

Q: And could October bring a cut?

A: The survey the ECB released last week showed that consumers expect lower nominal income growth, lower economic growth and more unemployment. I’m not saying that this would be reason for us to act, but additional negative information might lead us to discuss a cut again in October. For example, if the medium-term projections show inflation below 2% and we also get more negative economic data.

Q: Overall, is it fair to say that there is still another cut coming and it just needs to be timed correctly?

A: In my view, it is more true than not.

Q: As Olli Rehn pointed out yesterday, there is another rate cut incorporated in the June projections.

A: Yes, but if you look at the rate paths of previous projection exercises, they don't correspond to the path interest rates actually took. So, I don't consider the mere fact of a cut being incorporated in the projections to be a strong argument to cut.

Q: Do you see much potential for French instability to change your thinking about needing to cut?

A: No. The situation in any one country shouldn’t somehow suddenly change our perception. We think in terms of the euro area as a whole. Some countries are bigger than others, but things look smoother in the aggregate. And then - did we not know what French debt levels were? Nothing dramatic has changed.

Q: Back to low inflation next year, which is supposed to be only transitory. What would lead you to worry? What if it extends into 2027 instead of coming back up?

A: We shouldn’t be too preoccupied with the projections for the longer term. We are living in a volatile world where things can change quickly, so we should do the best we can to project future developments, but should also be realistic and reasonable about the forecast and the exercise. It's not about point-in-time targets. It's more about the economic processes. The economy is like a ship, and course changes take time. So, we should do what we can to identify an outlook on the basis of the best data that we have at the moment. At the moment, our best effort suggests that we’ll have 1.6% inflation on average next year and then 2% the year after. But I’m not naïve enough to think that this is a promise. The bigger picture – considering wage developments, core measures, expectations and everything else – is that we are largely on track but surrounded by risks. And some of these risks are materializing.

Q: How big a risk is the euro exchange rate?

A: It is a risk, of course. It adds to the downward pressure on prices in Europe. We don’t target the exchange rate, though. We will see to what extent it negatively affects price developments, but it supports my view that the risks are tilted to the downside, both to growth and inflation.