VIENNA-The European Central Bank should be prepared to quickly move its key interest rate in either direction if some of the potential threats to the eurozone economy arising from a fresh increase in uncertainty come to pass, Austria’s central bank governor said.
The ECB has kept rates on hold since June last year, with annual inflation having hovered close to the bank’s 2% medium-term target for much of 2025. Toward the end of last year, policymakers were seeing a reduction in uncertainty about trade that would be positive for the eurozone economy, while investors were betting that the next change in the key rate would be a raise.
But in an interview with The Wall Street Journal, Martin Kocher said a fresh increase in uncertainty since the start of the year makes it possible that the key rate will be lowered again, and also possible that the next move will be an increase.
“When you are at the end, or very close to the end, of this easing cycle that we have been following, then it’s always difficult to say what happens next,” said Kocher, a voting member of the ECB’s governing board. “In times where we really have high levels of uncertainty, it’s important to be in a situation where you can act quickly.”
The revival in uncertainty is largely due to developments in the U.S. In January, President Trump threatened to annex Greenland, which is a part of Denmark. Last month, the U.S. Supreme Court declared Trump’s country-specific tariffs to be illegal. While the administration works on new country-specific tariffs under a different law, a blanket 10% tariff has been imposed.
The attacks by the U.S. and Israel on Iran, and its response, have further raised the level of uncertainty for policymakers.
“At this stage, it is definitely too early to quantify any concrete impact of the unfolding events on euro area inflation or growth,” Kocher said.
Disruptions to oil markets or shipping through the Strait of Hormuz could increase costs and therefore inflation, but heightened tensions could weigh on economic activity, he said.
But in confronting that uncertainty, Kocher said it is important to respond to outcomes, rather than possibilities.
“There is a high option value of being able to act if and only if some of the risks of the uncertainties manifest themselves,” he said. “Pre-empting uncertain outcomes with monetary-policy decisions is complicated and perhaps dangerous.”
One of those uncertainties is the fate of the euro’s exchange rate. The currency has appreciated by more than 13% against the U.S. dollar in the last 12 months, making European exports more expensive. A stronger currency also brings inflation down as it makes imports into the eurozone, such as energy, cheaper. https://www.wsj.com/articles/ecb-should-be-prepared-to-move-rates-quickly-in-either-direction-austrias-central-bank-governor-says-c4c412e1?mod=global_more_article_pos3
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