Exclusive: ECB’s Patsalides: ‘An Aggressive Rate Cut Appears Unwarranted at This Time’

27 May 2025

By David Barwick and Marta Vilar – FRANKFURT (Econostream) – A rate cut of 50bp in the euro area is not warranted by the current situation, according to European Central Bank Governing Council member Christodoulos Patsalides.

In an interview on Monday with Econostream (transcript here), Patsalides, who heads the Central Bank of Cyprus, said that a relatively large reduction of interest rates would need to be based on weaker growth prospects that were visibly reinforcing the existing disinflation trend.

‘A 50bp rate cut would only be justified if the risks of recession within the euro area were to intensify, leading to more pronounced cyclical disinflationary pressures; however, this is not a highly probable scenario’, he said.

‘[C]onsequently, an aggressive rate cut appears unwarranted at this time’, he said.

Although steadily weaker price pressures argued for further easing, it was essential for the ECB to retain optionality, and another rate cut should thus not be regarded as automatic, he said, insisting that while the ECB might cut, it could also choose to stand pat.

‘While the prevailing disinflationary trend has strengthened on one hand the case for easing, that doesn’t automatically make a cut the “default”, especially in a world where geopolitical tensions, rolling shifts in trade policy, or renewed commodity price pressures could quickly reverse the picture’, he explained.

With the global economy being buffeted by a series of shocks and transitions, the ECB’s flexible, data-dependent approach to policymaking was particularly appropriate, he said.

‘Thus, preserving optionality remains essential in our calibration of our policy actions’, he said. ‘This does not exclude either a rate cut, or a skip, or a pause.’

The idea that the ECB ought to forestall the threat of inflation undershooting was not without legitimacy, he said, especially against the backdrop of high uncertainty regarding global trade.

To be sure, the latest data indicated that headline inflation could be stabilising in the vicinity of the ECB’s objective, though this needed to be carefully monitored, he said, noting the recent increase of core inflation.

‘Despite this uptick, the overall disinflationary trend is expected to continue as base effects and seasonal factors normalise over time’, he said. And although elements such as the stronger euro and weaker energy prices were tending to support further disinflation, their influence could be transient, he said.

Therefore, although there was a risk that inflation would descend to below the ECB’s 2% target, ‘any undershooting is expected to likely be temporary and short-lived’, he said.

Patsalides denied that current ECB interest rates were restraining growth. Rather, he said, ‘the real obstacles to growth lie not in the current level of interest rates, but rather in the broader environment of uncertainty and weak confidence, which monetary policy alone cannot fully address.’

The overall impact of tariffs in the short run would probably be disinflationary, Patsalides agreed. Further out, the net effect was more ambiguous, he said.

Still, in the present situation, the reduced trade and weaker general economic activity that tariffs would induce could be deflationary for the euro area, he said, even if other factors, in contrast, might boost price pressures.

The road to a trade deal between Europe and the US ‘seems to be becoming more challenging, especially after the announcement by the US of 50% tariffs in June, despite their subsequent postponement to July’, he said.

Ultimately, US policies could compromise the global status of the dollar, he said. In the event, ‘a boosting of the international role of the euro is more than welcome’, he said, urging in this context that the euro area make the most of the opportunity by becoming ‘more productive, competitive and resilient’.