FRANKFURT, Dec 19 (Reuters) – European Central Bank policymakers warned on Friday about oversized risks around their latest economic projections, making the case for caution in setting policy and not taking the option of another interest rate cut off the table just yet.
The ECB held rates steady on Thursday and revised up some of its growth and inflation projections, a move investors saw as a signal that no further cuts are coming in borrowing costs.
While markets have priced out any rate cut and now see an increase in 2027, a host of policymakers including Francois Villeroy de Galhau from France, Olaf Sleijpen from the Netherlands, Martin Kocher of Austria, Spain’s Jose Luis Escrivá, and Olli Rehn of Finland all cautioned against jumping to conclusions.
“We are not in a comfortable situation in terms of the overall economic situation because uncertainties remain high,” Kocher told reporters in Vienna. “That means there is both the possibility of a further cut, should that be necessary, and the possibility of an increase, should that be necessary.”
Spain’s Escrivá echoed Kocher’s comments, arguing that the next move could be in either direction.
Sources with direct knowledge of deliberations told Reuters that policymakers were broadly comfortable with market pricing of steady rates next year but wanted to avoid any signal that took further policy easing off the table.
Still, most saw the risks to growth and inflation as balanced, even if these risks were exceptionally large and were prone to sudden shifts due to geopolitical events.
“Risks for growth and inflation I think are fairly balanced, even though they are big,” Sleijpen said.
“We are still in a good place, inflation in Europe is moving very close around 2%; you might say it’s almost a kind of central banker’s nirvana,” he said. “But at the same time, we know the risks are still large.”
Speaking to Le Figaro on Friday, Villeroy took a more dovish view, arguing for “maximum optionality”.
“There are risks in both directions for inflation, but particularly on the downside,” he said. “We will therefore be as agile as necessary at each of our upcoming meetings.”
The ECB on Thursday raised its 2026 inflation projections because of quicker wage and services growth, but still predicted that overall price growth would undershoot its target over the coming two years.
While too-low inflation would normally warrant policy easing, it is mostly due to one-off energy impacts, and underlying price growth will remain above target, pointing to the need for caution.
However, energy prices have fallen further since the cutoff date for the projections and there is a risk that price expectations could start drifting lower on lower monthly inflation readings, perpetuating anaemic price growth.
“Despite recent positive growth surprises, the geopolitical situation and the ongoing trade war may still bring negative surprises for the euro zone,” Rehn said. “This outlook for inflation is more uncertain than usual due to both geopolitical confrontations and global trade disputes.”
(Reporting by Francois Murphy, Bart Meijer, Essi Lehto, Leigh Thomas, Jesus Aguado, Francesco Canepa and Balazs Koranyi; Editing by Hugh Lawson)
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