By Sergio Goncalves and Andrei Khalip
LISBON (Reuters) – The European Central bank may need to cut interest rates below a neutral level to stimulate economic growth as inflation is at risk of falling below the bank’s 2% target, ECB policymaker Mario Centeno told Reuters on Wednesday.
With tariffs on European goods threatened by U.S. President Donald Trump representing a further risk to growth, Centeno, governor of the Bank of Portugal said it was “pretty clear that we need to keep the trajectory of interest rates going down.”
The ECB’s key rate, currently 2.75%, needed to reach 2% “sooner rather than later” this year via further gradual cuts of 25 basis points, he said.
Centeno, one of the bank’s most outspoken policy doves, said even that might not be enough and the ECB may have to go below the neutral level – which no longer restricts economic growth and which most economists believe to be between 1.75% and 2.25%.
“We may need to go below neutral,” he said, adding that discounting base effects, inflation would already be lower than 2%.
“Our economy is not strong enough to support inflation at 2%. We also need to stabilise the real side of the economy so that inflation can converge, as it is converging, to 2% and stay at 2%.”
He blamed a lack of investment for Europe’s sluggish growth as well as consumers being cautious and companies not seeing adequate returns on investment.
Policymakers needed to strike a balance between containing cost pressures, increasing productivity and allowing wages to recover from the hit from inflation over the previous three years, he said.
Turning to U.S. tariffs, Centeno said they were “not good news” for all involved, but he did not rule out some deflationary impact from Chinese goods being redirected away from the United States at more competitive prices.
“Tariffs on Europe, which is the most open area in modern economies today, way more open than the U.S., can be quite impactful,” he said. “We expect that if time comes for us to do that (negotiate), that Europe can also show itself in the world as a quite united front.””And we need to see after March, what is the result of tariffs globally,” he said.
(Reporting by Andrei Khalip; Editing by Christina Fincher)
