ECB Officials Warn: The European and US Tariff Standoff May Increase Deflationary Pressure in September or Welcome the Last Interest Rate Cut

The Zhitong Finance App learned that during an interview while attending the annual policy meeting in Sintra, Portugal, Gediminas Simkus, a member of the ECB Governing Council and Governor of the Bank of Lithuania, pointed out that the current inflation situation in the Eurozone is still facing multiple downward pressures. He specifically warned that the recent sharp rise in the EUR/USD exchange rate and energy market fluctuations caused by the geographical conflict in the Middle East may cause the inflation rate to deviate once again from the 2% regulation target.” From a risk balance perspective, the probability that inflation will continue to fall below the target level has exceeded the upward risk.” The central bank official confessed.

Simkus stressed that although the latest forecast shows that the inflation rate will stabilize at 2% in 2027, the current price trend is still full of uncertainty. Geopolitical risks and the US Trump administration's aggressive trade protectionist policies are the main disruptors. In particular, the passive appreciation of the euro caused by the crisis of trust in US dollar assets is creating a double deflationary effect by reducing import costs and weakening export competitiveness.” “We must pay close attention to the pace of fluctuations in the euro exchange rate.” He pointed out. “Although the current exchange rate level has not broken through the historical range, the problem of the rapid rate of unilateral appreciation cannot be ignored.”

In terms of monetary policy trends, Simkus reiterated that keeping interest rates unchanged at the July regular meeting is the most likely policy option. This statement is in line with mainstream market expectations. Since starting the current easing cycle in June 2024, the ECB has lowered the benchmark interest rate eight times in a row, and the market generally expects the final interest rate cut operation to be implemented in September. The governor of the Bank of Lithuania explained that the current interest rate level is close to the theoretically neutral range, which neither stimulates the overheating of the economy nor poses a drag on growth.

When it comes to transatlantic trade relations, Simkus is cautious about the prospects for negotiations between Europe and the US. As the July 9 tariff exemption deadline approaches, negotiations between the two sides have yet to achieve a substantial breakthrough. He reminded policymakers not to ignore the impact of existing trade barriers: “Currently, European goods exported to the US face an average tariff rate of 10%. The impact of this protectionist measure on the real economy is not fully evident.” Against the backdrop of energy price fluctuations combined with trade frictions, ECB officials believe that the balance between maintaining price stability and safeguarding economic growth is becoming more and more complicated.