Transcript: Interview with ECB Governing Council member Šimkus on 07 April 2025

8 April 2025

By David Barwick – VILNIUS (Econostream) - Following is the full transcript of the interview conducted by Econostream on 07 April 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, “Liberation Day” came and went. What are the implications of the tariff announcement?

A: Huge global trade uncertainty was already a drag on economic activity before ‘Liberation Day’, and stock prices in the US clearly showed concerns about the potential for this to weigh on business confidence, capital spending, consumer confidence and so on. To some extent, the April 2 announcement makes the picture clearer, but it was also a tangible escalation of trade tensions and much stronger than expected. So here as well, the markets’ reaction is indicative of the thinking of those who bet their own money based on where they think the economy is going. Of course, much will depend on retaliation. But even though we cannot rule out a partial reversal of the April 2 measures, it's hard to see a huge change in the near term from what was announced, given that all countries in the world were hit by tariffs. From a monetary policy perspective, it's crucial to distinguish between the short term and the medium to long term. In the short term, the tariffs could lead to some upward price pressures in the euro area. But our more medium-term focus should remain on the underlying dynamics, not on the - hopefully -transitory supply shock. And the longer-term effects of the tariffs are weaker demand, lower growth, reduced business confidence, reduced capital spending, weaker consumer confidence - all disinflationary. This warrants a more accommodative policy stance to ensure that inflation converges to our medium-term target.

Q: ‘More accommodative’ than what? Monetary policy was already likely to be eased further.

A: I’m comparing not to any hypothetical alternative, but simply to where we are now, and thinking about what we need to do in April and, depending on developments, June.

Q: So, has your view of the proper pace changed?

A: Not really. My thinking is that with the DFR now at 2.5%, policy is currently still more restrictive rather than neutral. Even before April 2, we had a weakened economic situation and increased uncertainty. Euro area growth was sluggish; we repeatedly lowered growth projections for this year. At the same time, we saw inflation returning to target. And now, we have a worsening of the trade tensions that can be deflationary in the medium term. So, my view is that we should proceed with cuts at the next opportunity. A risk management approach requires that we get to a less restrictive stance.

Q: This medium-term deflationary impact of trade tensions suggests that the risk of undershooting the target has increased.

A: It’s hard to say. Things are evolving, which makes it difficult to draw big conclusions. With the new projections in June, by which point things will have hopefully settled down a little bit, it will be easier to say. But even before the new tariffs and the fiscal changes in Europe, the risk of undershooting our target had increased, and we should carefully monitor this.

Q: Given everything, should the ECB change the language of the monetary policy statement in April, or should the policy stance continue to be characterised as ‘meaningfully less restrictive’?

A: I understand that this is important for financial markets, but my thinking is that language cannot dictate our actions, so I’m less preoccupied by any particular language and am more focussed on our actions and grounding these on real data, economic thinking, macro projections and financial data.

Q: Is the ECB behind the curve? Do we have to talk about cutting by 50bp?

A: No, I see no need to talk about 50bp. That would be too much. We are not behind the curve. Of course, there is a lot of uncertainty about everything in the world, but we are very agile, and like my colleague Fabio Panetta once said, we can take small steps in a dark room. So, I think 25bp is needed in April, and as June is considered June, let’s see what has changed from April to June, and then make a decision.

Q: Back in February, you agreed with expectations of three more rate cuts this year, one of which we had on March 6. Given how much has changed, where does this stand now?

A: The reality is that we already had and still have this huge uncertainty. In a way, the April 2 announcement provided some clarity, much more disappointing than anticipated, but still left us with huge uncertainty. We already knew that we were entering a more fragmented world with more protectionism, and April 2 confirmed this. I can’t say for sure from today’s perspective whether we need another two or three rate cuts this year, because that would imply a certain rate path in my head, and we need to be flexible, agile. So many things are happening. But all in all, we need to move to a less restrictive policy stance.

Q: Do we need to enter accommodative territory?

A: If there were a way to define this with one number, that would be good, but there isn’t. It’s an interval. Currently we are on the upper side of the upper bound of the interval, and even with the next rate cut, we will still only be on the lower side of the upper bound of the interval.

Q: Some people will see huge uncertainty as reason for the ECB to pause in April. How do you see it?

A: Let’s take a full picture: Headline inflation is going down. Core inflation is decreasing. Services inflation is also down. We already have several downward revisions of GDP growth. We have productivity problems. We see medium-term inflation returning to our 2% target. Wage growth is expected to decline quickly this year. We have uncertainty about global trade. And on top of everything, we have high US tariffs now, and so does everybody else, which is going to hurt the global economy. The underlying forces still make me think that in the medium term, undershooting or being at target is more probable than overshooting. To summarise, I still think that we need to cut rates in April, and then, with a lot more information in June - hopefully including more clarity on tariffs and other things - we can think about whether we should wait and see or cut again.