Trump uncertainty means no big interest rate moves soon, European central banker signals

The European Central Bank should continue cutting interest rates steadily and refrain from bigger moves in view of the massive uncertainty generated by the election of Donald Trump for a second term, Governing Council member Yannis Stournaras said.
The Bank of Greece governor told POLITICO in an interview that the policies promised by Trump during the election campaign risked reviving inflation if implemented.
“The best thing for us to do is to wait for the new president and the new government to be in place, and then to reconsider our position,” Stournaras said.
The comments from the “arch-dove” on the ECB’s policy-setting body may dampen speculation that it will opt for a half-point cut to its key interest rates in December. While Stournaras’ opinion matches the consensus view, a sizeable minority in financial markets are betting on more aggressive action.
Much will hinge on whether Trump delivers on threats to impose massive tariffs on his trading partners and how they respond. Large U.S. tariffs would result in lower growth and lower inflation for the eurozone should Europe decide not to retaliate, Stournaras said. Should Europe opt for countermeasures, however, it might also see a jump in inflation.
Either way, he noted: “Everything points in the direction of further cuts” from Frankfurt, given the economy’s struggle to get out of first gear this year, and given that inflation has fallen back to the ECB’s target much faster than previously anticipated.
For now, Stournaras expects the ECB to execute a string of back-to-back interest rate cuts until they reach the ‘neutral’ level, at which they would neither constrain nor boost economic activity. Stournaras sees this level at around 2 percent, whereas the ECB’s key deposit facility rate has stood at 3.25 percent since October. A succession of shocks to the economy from Covid, the Ukraine war and the growing fragmentation of the world economy have left huge uncertainty on the Governing Council as to where that neutral level is.
“From what we know, we are now in quite restrictive territory [even though] inflation is very close to target,” Stournaras observed.
He pointed out that the 2 percent target will likely be achieved on a sustainable basis in the second quarter of next year — two quarters earlier than previously anticipated. “If inflation continues on its path, we can cut interest rates at every meeting so long as we are in restrictive territory.”
Stournaras declined to say whether he would support cutting rates even more deeply to actively stimulate the economy. “It’s too early to say,” he said.  Recent data showed eurozone gross domestic product actually grew more than expected in the third quarter, by 0.4 percent. However, that was in part due to a one-off boost to consumption from the Paris Olympic Games.
While at the moment all signs point to a soft landing and no recession, he said, things could still turn out bleaker requiring more action. The ECB’s official view is that the risks to the economy are tilted to the downside.
Elsewhere in the interview, Stournaras gave a passionate defense of the ECB’s quantitative easing programs, as some of his colleagues press to make it harder to turn to large-scale asset purchases in the future. Ahead of a fresh strategy review, scheduled to wrap up in the second half of 2025, the ECB’s head of markets Isabel Schnabel has argued that “the bar for starting QE should be higher than in the past.”
The ECB bought just over €5 trillion in bonds under various crisis programs over the past decade, but the vast overhang of liquidity they created has made it harder for the ECB to steer the economy since, Schnabel argued. While QE has proven to be a powerful tool for market stabilization, the “cost-benefit ratio is less favorable when it comes to stimulating the economy near the effective lower bound,” she said in a recent speech.  
Stournaras disagreed, noting studies that showed QE had helped fend off deflation, supporting growth, especially at a time when interest rates couldn’t be lowered further. “Without QE, we might have had much lower inflation and much weaker growth,” he said.
He also played down the slow unwinding of the measures, noting that the ECB is reducing its balance sheet faster than some of its peers without any undue effects on long-term interest rates.
Stournaras warned Europe can’t rule out the possibility that it might face similar conditions — and as a result the need for QE — again soon. “If the economy weakens, if things on the other side of the Atlantic become worse, if tariffs are imposed everywhere, if there is retaliation, then we might have a recession and deflation,” he said.
More broadly, Stournaras argued that the very same uncertainty that keeps him cautious on policy today is also an argument for the ECB not to circumscribe one of its most powerful tools tomorrow.
“Why should we exclude instruments that we have used in the past?” he said. “Conditions might not be appropriate today for one thing or another, but they are part of our experience. They are part of our DNA now.”
Achieving a soft landing, he argued, would be evidence that the current strategy is working well, both in terms of interest rates and the use of the balance sheet. “So, I don’t think we will drastically change our strategy” he said. “I think flexibility is the name of the game.”