The European Central Bank (ECB) doesn’t care what the Federal Reserve is up to. That’s the message François Villeroy de Galhau, a member of the ECB’s Governing Council, delivered in an interview with Ouest-France.
He emphasized the ECB’s independence under Christine Lagarde. “The decisions we make at the ECB with Christine Lagarde are independent of those of the Fed,” he said. He pointed out that the ECB started slashing rates back in June, months before the Fed made its first move.
With inflation cooling in Europe, the ECB is ready to keep cutting. But there’s a twist. Donald Trump’s return to the White House in January is expected to stir global economic trouble. Villeroy thinks protectionist policies under Trump will push U.S. inflation higher while slowing growth around the world.
This chaos is already leading economists to second-guess the Federal Reserve’s ability to keep cutting rates. The Fed, which dropped borrowing costs by 75 basis points over two meetings, might go for one more cut in December but is widely expected to pause in January.
Meanwhile, the ECB has no such hesitations. It has already made three rate cuts since June and plans more, possibly through the next four meetings.
Villeroy explained why the ECB can afford to stay aggressive. Prices across Europe are rising more slowly than wages, giving the bank room to loosen monetary policy without fueling inflation. “Prices are increasing less quickly than wages on average—this also allows us to lower interest rates,” he said.
Eurozone inflation climbs but doesn’t rattle ECB
Inflation in the euro area is creeping up, but the ECB doesn’t seem to care. Forecasts suggest consumer prices rose 2.3% in November, the highest jump in four months. Core inflation, which cuts out volatile stuff like energy, likely ticked up to 2.8%.
That sounds like a problem, but officials are brushing it off as temporary. A year ago, these numbers would’ve set off alarm bells, but now? Not so much.
Greek central bank chief Yannis Stournaras isn’t worried at all. He thinks inflation is basically under control and could even fall below the ECB’s 2% target by 2025. “We should have a cut in every meeting from now on until we get to what we call the neutral rate,” he said in an interview with Bloomberg.
For the ECB, the “neutral rate” is around 2%, and Stournaras wants to get there fast. He expects another 25-basis-point cut in December but didn’t rule out a sharper 50-basis-point move.
Not everyone on the Governing Council is so chill though. Austria’s Robert Holzmann warned that inflation isn’t tamed just yet. But even skeptics like him can’t deny that the ECB’s easing spree is gaining momentum. Investors are betting on another aggressive rate cut next month as weak private-sector activity in Europe adds to the urgency.
Trump’s looming tariffs are another headache for the ECB. His plans to hit Europe with trade levies could crush already fragile growth, pushing the eurozone closer to recession or even deflation.
Economists are especially worried about Spain, where inflation is expected to spike 0.7 percentage points to 2.5%, driven largely by energy prices. All four of the eurozone’s largest economies are seeing similar trends, with energy costs fueling the uptick.
Despite these risks, the ECB seems determined to ignore short-term inflation spikes and focus on the bigger picture. Stournaras called the recent rise in inflation a “blip” and said it won’t stop the bank from continuing its rate-cutting campaign.
Rate cuts to keep coming, but uncertainty remains
The ECB’s last policy meeting of the year is shaping up to be a big one. Investors are already pricing in another quarter-point cut, with some speculating that the bank might go even bigger. Vice President Luis de Guindos made it clear that more rate cuts are coming, but he also urged caution.
“It’s crystal clear” that rates will be reduced further, he said, but the ECB can’t ignore the uncertainty in global markets. One big unknown is wage growth. Negotiated wages in the eurozone jumped by a record amount in the third quarter, marking the biggest increase since the euro was introduced in 1999.
Analysts expect this trend to cool off next year, but for now, it’s complicating the ECB’s efforts. Higher wages could keep inflation sticky, making it harder for the bank to justify aggressive cuts.
Still, most experts agree that the ECB isn’t done cutting. Stournaras predicts that the deposit rate will drop to 3% by the end of December. He called this the “right response” for now but admitted that everything depends on how markets and the Fed react.
“We still don’t have anything on the table on the other side,” he said, leaving the door open for larger or more frequent cuts.
Upcoming inflation data will be critical. Reports from major eurozone economies start rolling in on Thursday, with the region-wide numbers expected on Friday. These figures will give the ECB a clearer picture of where prices are headed and how much energy costs are driving the increases.
If inflation stays manageable, the bank will likely stick to its easing plan. But if prices start spiraling, all bets are off. Trump’s protectionist policies are another wild card. His promised tariffs on European goods could wreak havoc on the region’s economy, hitting exports and weakening demand.
Stournaras warned that such measures could lead to deflation, a nightmare scenario for the ECB. For now, the bank is focused on stabilizing inflation and boosting growth, but external shocks like this could force a rethink.
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