European Central Bank leadership undergoes a major reshuffle, could the interest rate cut path change?

Zhitong Finance APP reports that the European Central Bank is about to enter a new unpredictable phase, with the terms of 7 out of its 26 rate setters ending in December, marking the largest personnel change since 2019. Among those departing are Klaas Knot, the longest-serving president of the Dutch central bank, and several former finance ministers who experienced the European debt crisis. Their expertise may be missed by the market as budget pressures mount again and uncertainties from the U.S.-led trade war increase.

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After experiencing the worst inflation in history in the eurozone, even some members who have successfully been reappointed, such as Martins Kazaks from Latvia, are facing severe tests. Kazaks received approval for a five-year reappointment on Thursday, having been in a state of uncertainty since the end of his first term last December.

Although a fundamental shift at the European Central Bank is unlikely, ECB watchers will face a more challenging task, as the balance between hawks and doves may change. This is far from an ideal moment, as U.S. President Trump may impose tariffs on the G20 trade group, which could further weaken already fragile economic growth expectations.

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Carsten Brzeski, head of macro research at ING Groep, stated, "These changes come at a very inopportune time, as the ECB will face tough decisions this year—the economic outlook has deteriorated, Trump's expected policies may worsen it further, while inflation remains too high." The latest batch of data from the eurozone shows that GDP unexpectedly failed to grow by the end of 2024, while inflation slightly rose in January, catching analysts off guard.

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Officials still believe that consumer prices will fall to the 2% target level in the coming months and plan to continue easing monetary policy, with the current deposit rate reduced from 4% in mid-2024 to 2.75%. However, it remains unclear what measures they will take, and the addition of new members may make the path and targets harder to discern.

Goldman Sachs chief European economist Jari Stehn stated, "When new members join the governing council, their positions are not clear, and they are often reluctant to signal at the beginning." "The less guidance there is, the harder it is to make accurate predictions."

José Luis Escrivá, the Governor of the Bank of Spain, is an example. Despite his extensive knowledge of monetary policy, he has not made a public statement since taking office in September.

Many analysts believe that the current trajectory of declining borrowing costs is clear, and despite personnel changes, the continuity of the European Central Bank (ECB) is assured, especially since any personnel changes will not affect the powerful Executive Board.

Anatoli Annenkov, an economist at Société Générale, stated, "The ECB is well protected in terms of decision-making and independence. In this sense, institutions are more important than individuals."

Even so, after experiencing "autopilot" rate cuts in January and March, Fabio Balboni, a senior economist at HSBC, believes that as hawks and doves vie for position, "the situation may heat up in spring."

A debate that seems to be intensifying is about the so-called neutral interest rate, which neither restricts nor stimulates economic growth. Opinions on this theoretical level vary, and policymakers disagree on whether to go below this level.

This makes the potential balance of tendencies important, with four of the seven Governing Council members (including Knot and Austria's Robert Holzmann) leaning hawkish. The latter will be replaced by Labor and Economy Minister Martin Kocher, who rarely comments on monetary policy and only praises the ECB's anti-inflation efforts.

If Trump follows through on his trade threats against the EU, this reform could also slow the ECB's response. Other officials who may leave include former Eurogroup President Mario Centeno of Portugal and former EU Commissioner Olli Rehn of Finland. However, the latter seems to have better prospects for staying.

However, the other side of this argument is that too many politicians joining the Governing Council could test the ECB's independence. ECB President Christine Lagarde recently emphasized the importance of being able to act without political interference in a turbulent economic environment.

She stated, "Central banks must have independence to fully fulfill their price stability responsibilities." The market generally believes that the ECB will respond robustly to this year's personnel changes, and when adjusting interest rate bets, the market will continue to focus on data rather than personnel.

But this reshuffle may foreshadow more significant upheavals in 2026 and 2027: this period will not only witness the end of Lagarde's term but also the end of the terms of Vice President Luis de Guindos, Chief Economist Philip Lane, and Executive Board member Isabel Schnabel