Transcript: Interview with ECB Governing Council member Patsalides on 26 May 2025
27 May 2025
By David Barwick and Marta Vilar – FRANKFURT (Econostream) – Following is the full transcript of the interview conducted by Econostream on 26 May with Christodoulos Patsalides, Governor of the Central Bank of Cyprus and member of the Governing Council of the European Central Bank:
Q: Governor, it’s too early to say whether June would bring a cut or a pause. But:
• policy is no longer restrictive
• disinflation is well on track, with services inflation and wage growth down
• the euro is way up
• financial markets have calmed down and Trump appears to have grasped the idea that they can’t be ignored.
So, based on what we know now, why wouldn’t a terminal rate of 2.25% be absolutely reasonable?
A: While we continue to observe disinflationary progress aided by a meaningful downward push from falling energy prices and a stronger euro, the level of uncertainty remains high, fuelled by the ambiguous US tariffs policies and other geopolitical risks. There is no certainty about how long this disinflationary trend will go on. There is no foreseeable terminal date for the easing of unpredictability. So, rather than fixating on any specific interest rate end point, we should instead remain firmly guided by data and evolving conditions. Preserving flexibility is essential.
Q. Would you agree that a cut is the default option for June in the sense that pausing needs a clearer justification, not obvious at the moment, than a cut would need?
A: I wouldn’t quite frame it that way. 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.
We are not in a steady-state environment. The global economy is going through consecutive shocks and structural transitions — in trade, technology, and demographics — which demand, now more than ever, a more flexible, data-driven approach. Thus, preserving optionality remains essential in our calibration of our policy actions. This does not exclude either a rate cut, or a skip, or a pause.
Q: What would it take to change your mind, and more generally, what data are you currently looking at with particular interest?
A: A shift in the current trajectory of inflation would be key. If for example, we were to see renewed, persistent inflationary pressures, that would certainly warrant caution. In this respect, we are closely monitoring and assessing developments in inflation outlook, its underlying dynamics and the potency of our monetary policy passthrough. We are particularly mindful of services prices growth and wage dynamics, overall survey-based inflation expectations as well as confidence indicators.
Our evaluation in June will be enriched with the new set of macroeconomic projections and accompanying scenarios analysis, which will shed light on whether the current level of interest rates is in line with the sustained convergence of inflation towards our target.
Q: What do you make of market expectations that envision the ECB taking rates below 2%? Does this reflect unreasonable pessimism about the euro area economy?
A: It should be noted that markets sometimes overreact to short-term developments. Increased volatility and unusually elevated uncertainty regarding future tariff policy rattle the markets. Severe adverse effects could come from reduced household and business confidence. This suggests that markets perceive the need for monetary policy to be somewhat more accommodative than would otherwise be the case and explains the small downward revision in interest rate expectations to below 2%. At the same time, the conditions remain in place for a continued, albeit possibly slower, GDP growth recovery, including ongoing growth in real incomes.
A recession in the euro area is currently unlikely. However, one could argue that monetary policy should guard against the risk of inflation falling below target, particularly given the elevated uncertainty surrounding economic and trade policies at this juncture. That said, we should not overlook the role of other policy levers—especially fiscal policy—in supporting demand and stabilising the economy.
Q: Most Council members, including Vice President de Guindos in remarks he’s made, seem convinced that the tariffs will ultimately prove more deflationary than inflationary. Do you agree?
A: I would agree that — on balance — tariffs are currently more likely to exert downward pressure on inflation in the short-term. In the longer-term, trade barriers are an obstacle to growth. But as we move forward the net impact becomes less clear. We have entered a new era of sanctions, increased tariffs and other restrictive measures, leading to growing introversion and disunity on a global scale.
Tariffs typically raise the price of targeted imports, but their broader macroeconomic effects can vary significantly. In the current context for the euro area — with global demand subdued, supply chains being reconfigured, and investment under pressure — tariffs may well have a deflationary effect over time by dampening trade flows and slowing growth. At the same time, new disruptions in global supply chains may fuel new inflationary momentum. Furthermore, firms may increase their prices domestically to recover part of their reduced export revenue due to tariffs.
The euro’s recent appreciation, which defies conventional forecasts, adds another layer to this dynamic. It reduces the cost of imports, counteracting part of the inflationary effect of tariffs. At the same time, it weighs on exports’ competitiveness.
Additionally, there are several second-order effects worth considering. The diversion of Chinese exports away from the US and toward Europe may lead to lower import prices in the euro area, reinforcing deflationary pressures.
It is also important to acknowledge that the effects of tariffs are not uniform across the euro area. Different economies are exposed to varying degrees depending on their trade composition, sectoral dependencies, and integration into global value chains.
Finally, any retaliatory measures adopted by the EU in response to US tariffs could introduce upward price pressures, especially if they target intermediate goods or strategic imports. These inflationary effects, however, would likely be uneven and depend heavily on the scope and scale of the retaliation.
Q: So far, we’ve heard only a couple of your colleagues say that rates are no longer holding back growth. Do you feel that rates are holding back growth?
A: Our policy stance remains prudent and carefully calibrated in response to the most recent economic and financial data, as well as the evolving risk environment. The elevated uncertainty, which has markedly intensified since April 2nd, is the main concern of the growth trajectory within the euro area. This increased uncertainty is largely attributable to ongoing ambiguities surrounding trade policy developments, including the absence of a clearly defined trajectory for future trade agreements. Such uncertainties have adversely affected business confidence and household expenditure. Consequently, there has been a shift towards more cautious behaviour among both firms and consumers, particularly with regard to investment and consumption decisions. Taken together, these factors suggest that 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.
At the same time, it should be noted that financial conditions have tightened temporarily, as evidenced by the widening of credit spreads and the decline in equity prices, which collectively contributed to a contraction in monetary conditions. The easing cycle is currently advancing, with the transmission mechanism functioning effectively and the effects of rate reductions affecting the real economy. At the Governing Council, we have consistently indicated our preparedness to adjust all instruments within our mandate as needed.
Q: How much clarity do you expect the ECB to gain by 5 June, and in what specific respects?
A: For the upcoming June round, the Governing Council of the ECB will have an updated set of economic projections. In particular, given the current elevated uncertainty, scenario analysis will attempt to capture the effects of the current trade turmoil, complementing the baseline, to underpin our monetary policy decision. From the external side, some further clarity on tariff developments may emerge. The de-escalation in China-US tariffs and the UK-US trade deal could signal an upcoming EU-US deal, however this seems to be becoming more challenging, especially after the announcement by the US of 50% tariffs in June, despite their subsequent postponement to July. Domestically, further clarity on labour market prospects, including the wage path, is also expected. As tariffs on EU’s exports and the associated uncertainty weigh on activity, it is important to check for signs of a more rapidly cooling labour market, possibly feeding through to lower wages and supporting the HICP services disinflationary path.
Q: How worried are you about undershooting the target, especially with this apparently growing anti-dollar sentiment?
A: Recent headline inflation data for the euro area indicate that inflation remains broadly aligned with expectations, standing at 2.2% in April. This figure suggests a stabilisation around the target zone, although underlying dynamics warrant close attention. Notably, core inflation excluding volatile energy and food prices exceeded expectations, rising from 2.4% to 2.7%. This increase was primarily driven by a rise in services inflation, which moved from 3.5% to 3.9%. The surge in services inflation is largely attributable to an Easter timing effect, which temporarily elevated prices. Despite this uptick, the overall disinflationary trend is expected to continue as base effects and seasonal factors normalise over time.
Although additional disinflationary factors are influencing the outlook—such as euro appreciation, declining energy prices, and potential trade diversion from China to the euro area, which collectively exert downward pressure on import prices—these effects may prove to be temporary. While there is a risk of inflation undershooting the target, any undershooting is expected to likely be temporary and short-lived.
Q: How worried are you about monetary policy falling behind the curve? Is a 50bp cut needed, or could you envision one?
A: 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.
While growth remains subdued, the outlook remains uncertain. A significant decline in exports to the United States could pose a downside risk, although there are significant ambiguities surrounding trade policy developments, including the absence of a clearly defined trajectory for future trade agreements. Moreover, there has been a shift in capital flows away from the US, with increased reinvestment activity directed to euro area, which helps to support domestic financial conditions. Taken together, these factors suggest that the euro area is likely to avoid a recession, and consequently, an aggressive rate cut appears unwarranted at this time.
That said, the Governing Council of the ECB has consistently indicated its preparedness to adjust all instruments within its mandate to ensure that inflation stabilises sustainably at our medium-term target and to preserve the smooth functioning of monetary policy transmission. Moreover, we should not lose sight of the important role that other policy areas—particularly fiscal policy and structural reforms—play in supporting sustainable growth. Monetary policy cannot address structural weaknesses in the economy, nor can it substitute for targeted national policies aimed at boosting productivity, investment, and potential output.
Q: Madame Lagarde at the last press conference introduced the word ‘agility’ into the discourse. What does this concept mean for you in the context of current ECB monetary policy?
A: Agility, along with flexibility and full optionality, are cornerstone concepts behind the gradual and cautious calibration of our monetary policy decisions. Under this fast-changing and exceptionally uncertain environment, the need for our policy to be responsive and adaptable is as important as ever.
While our confidence in the disinflationary process has significantly increased, the outlook remains surrounded by uncertainties. In this setting, we are avoiding any pre-commitment and keeping all options open, while continuously reassessing the situation as new data come in. Our decisions are not on autopilot and the frequency and speed with which the current landscape changes reinforce the importance of a meeting-by-meeting and state-contingent prudent approach. And as our Monetary Policy Statement concludes, at the Governing Council we stand ready to adjust all of our instruments within our mandate to ensure that inflation stabilises sustainably at our medium-term target and to preserve the smooth functioning of monetary policy transmission.
Q: As your colleague Governor Müller has correctly pointed out, the credibility of the US is suffering from Trump’s erratic economic policies. Given this, after years of people wondering whether the dollar would have to give up its role of reserve currency, do you think maybe the moment has finally come? Should the ECB encourage a shift in favour of the euro?
A: The dollar’s dominance in financial markets stems from both the stability of the US economy and the large global dollar liquidity. In my view, the USD’s role as a reserve currency may gradually be eroded if such policies result in global instability and a sustained loss of US competitiveness, leading to a persistent decline in the size and global influence of the US economy.
That said, a boosting of the international role of the euro is more than welcome, and to support this, pan-European initiatives to make the euro area economy more productive, competitive and resilient are paramount. This includes promoting policies to eliminate bottlenecks in the Single Market, boost the capital markets union and promote the venture capital space. Such policies would allow easier access to the European markets, making them truly function as a single economic space.
Q: How much more concerned are you now about the stability of the global financial system than you were before April 2?
A: Even if the trade war vanishes from the world scene, it is probably the case that the world economy will not return to the status quo ante any time soon. The erosion of confidence in the US economy and in the global order of international trade and finance is expected to give rise to a heightened global cost and risk premium. Otherwise put, I believe, the current state of affairs has brought about a long-lasting burden on the global economy consisting of two components: a cost premium arising from the protectionist policies and a risk premium arising from the unpredictability in the manner of implementation of such policies. Naturally, the stability of the global financial system is put at greater risk.
Q: Some governors felt that the April 17 cut was warranted by the imperative of not surprising the markets at the current juncture. Was this an important consideration for you? Do you consider it to continue to apply?
A: While we do not follow the market, at the same time, market expectations are always indirectly taken into consideration in our decision-making process. And this is because market expectations are also based on our communication about our decision framework and reaction function. At the Governing Council of the ECB, we aim to maintain clear communication with the markets to avoid any unintended wrong signalling which may lead to an unfavourable market reaction - against our stance direction – and/or volatility. Within our mandate of price stability, preventing market surprises is important, especially during the current periods of heightened uncertainty.
That said, the core calibration mechanics determining our appropriate policy stance continue to be based on the assessment of all incoming data and developments, the inflation outlook and dynamics and the transmission of our monetary policy, on a meeting-by-meeting approach, which has served us very well under this constantly renewed uncertain landscape.