Is the end of interest rate cuts in Europe approaching? Several central bank officials claim that inflation has been controlled, but risks still remain

According to the Zhitong Finance APP, European Central Bank Vice President Luis de Guindos stated that the risk of inflation falling below the European Central Bank's 2% target has been controlled. In an interview, he mentioned that although consumer price growth is expected to slow to 1.4% in the first quarter of 2026, it will not shake market expectations.

At the same time, wage growth is returning to levels consistent with the European Central Bank's target.

"In my view, the risks of inflation declining are very limited," de Guindos said, according to the interview transcript published on the European Central Bank's official website. "Our assessment is that inflation risks are balanced."

As the eurozone inflation rate hovers around the target value and the economy has shown resilience so far, European Central Bank President Christine Lagarde has hinted that the easing cycle is nearing its end. Over the past year, policymakers have cumulatively cut the key deposit rate from 4% to 2% in eight moves.

Lagarde stated that the rate-cutting cycle is about to end, as the European Central Bank is in a "favorable position" to respond to uncertainties, but some policymakers have recently suggested that "fine-tuning" may still be necessary.

"The market fully understands the President's statement about being 'in a favorable position,'" de Guindos said. "Even in the current highly uncertain environment, I believe the market trusts and has digested the expectation that we are very close to maintaining a sustainable inflation target of 2% in the medium term."

However, uncertainty remains high, especially influenced by the fluctuating policies of U.S. President Trump (particularly trade policies). Surveys show that economists still expect another rate cut this year.

De Guindos stated that the euro appreciation triggered by Trump's policy statements has not yet posed a significant concern for the European Central Bank. "An exchange rate of 1 euro to 1.15 dollars will not pose significant obstacles to the economy or inflation," he pointed out. "Rather than focusing on specific exchange rate levels, we need to pay attention to the speed of changes—the intensity of appreciation or depreciation. Currently, exchange rate fluctuations remain quite controllable."

Maintain Flexibility

Joachim Nagel, President of the German Central Bank and a member of the European Central Bank's Governing Council, stated that given the persistent high uncertainty regarding growth and inflation prospects, the central bank must maintain sufficient flexibility in its interest rate decisions.

Nagel said on Monday: "In the current environment, key factors may change rapidly, and maintaining flexibility is a wise move. This means that pre-setting future paths—whether for further rate cuts or pausing monetary policy adjustments—is unreasonable."

Nagel pointed out that recent data and European Central Bank forecasts indicate that inflation has "achieved its mission." However, he also warned: "We have no reason to be complacent and must remain vigilant about the risks to price stability, especially given the current developments in the Middle East," referring to the ongoing escalation of conflict between Israel and Iran.

European Central Bank's New Inflation and Growth Forecast

After a cumulative interest rate cut of 200 basis points within a year, policymakers are assessing whether borrowing costs have reached the end of this cycle or if further reductions are needed. The current key deposit rate of 2% is widely viewed as neutral for economic activity.

The eurozone's inflation rate in May has fallen to just below the 2% target, and it is expected to slow further by 2026, with a return to the target not anticipated until 2027.

Nagel agrees with this: "A sustained period below the inflation target is unlikely." He emphasized that core inflation (especially the rise in service costs) remains at excessively high levels and noted: "The current level of interest rates puts us in a favorable position to respond to various changes in circumstances, and the current key rate is clearly no longer restrictive."