"Hawkish" ECB Officials Publicly Oppose Interest Rate Cut: Remain Calm Amid Trade Disputes

The most hawkish policymaker at the European Central Bank (ECB) stated that the bank should at least pause interest rate cuts until September. He also warned that, amid escalating trade tensions between the EU and the US, "we should remain vigilant" to address potential risks.

Austrian central bank governor Robert Holzmann said in a media interview that he believed there was "no reason" for the ECB to lower interest rates at its June and July policy meetings, and that "the risks of continuing to cut interest rates are greater than maintaining the current rate level until September."

Holzmann believes that further interest rate cuts at this time "will have no impact on economic activity in the eurozone."

His "hawkish" remarks highlight divisions within the ECB over the interest rate path, particularly ahead of the next meeting on June 5, as policymakers weigh how to respond to the trade war led by Trump.

Last week, Trump threatened on social media to impose a 50% tariff on goods imported from the EU starting June 1, but after a phone call with European Commission President Ursula von der Leyen, he agreed to delay the start date from June 1 to July 9.

Earlier this month, another hawkish figure, ECB Executive Board member Isabel Schnabel, also warned that the trade conflict could drive up inflation and limit the central bank's policy room for maneuver.

In contrast, Pierre Wunsch, governor of the Belgian central bank—who was previously also seen as a hawk—called earlier this month for the ECB to be prepared to lower interest rates to "slightly below 2%" this year.

Since June last year, the ECB has cut its deposit facility rate seven times, from 4% to 2.25%.

With eurozone inflation currently close to the ECB's medium-term target of 2%, but with weak growth expectations, markets widely expect the ECB to cut interest rates by another 0.25 percentage point in June, with further cuts possible later this year.

In response, Holzmann pointed out that the root cause of the slowdown in eurozone economic activity is "extreme uncertainty," rather than overly tight monetary policy.

"Market participants are postponing key economic decisions and are reluctant to take action. Everyone is waiting and seeing." In such circumstances, he believes that even if interest rates are cut, the effect will be minimal or even non-existent.

Holzmann believes that the ECB's current monetary policy is not only not restraining the economy but may even begin to stimulate growth. He believes that the so-called "neutral interest rate" is roughly between 2.5% and 3%.

"Since the beginning of 2022, almost all the latest estimates of Europe's neutral interest rate have shown a significant increase. Our current interest rate level is at least already within the neutral range."

In addition, the new German Chancellor Mertz's plan to promote spending of up to 1 trillion euros through borrowing has become another reason for Holzmann to call on the European Central Bank to "maintain stability."

Holzmann believes that if the German government can truly implement these fiscal expenditures, it will effectively boost the economy of the entire eurozone. He described this move as a "fiscal shock for Europe that will help reverse the current development trend."

Holzmann acknowledged that "many" of the other 25 Governing Council members of the European Central Bank are "more dovish" than he is, but he emphasized that he "does not feel isolated at all," and stated that "quite a few" in the decision-making body are also skeptical about further interest rate cuts.