By Balazs Koranyi
WASHINGTON (Reuters) -The European Central Bank should hold interest rates steady unless new shocks hit, Slovenia's acting central bank chief said, pushing back on arguments that inflation
could fall too low without further easing.
The ECB has cut interest rates by 2 percentage points in the year to June but has been keeping them steady since, debating whether tariffs, Germany's fiscal splurge or a strong euro would pull prices away from its 2% target.
"Inflation risks are balanced around the baseline scenario," Primoz Dolenc told Reuters in an interview.
STEADY RATES THE RIGHT APPROACH
"If there are no new economic shocks, I think that leaving the monetary policy stance as is would be the right thing to do going forward," he argued. "It's a stance that neither fuels inflationary pressures nor restricts economic growth."
Markets see close to no chance of another rate cut this year and see just a one in two chance of a cut by June, a sharp contrast with the U.S. Federal Reserve, which is expected to cut rates at both of its remaining meetings this year.
Dolenc also cautioned against putting too much emphasis on ECB projections far into the future, including the initial 2028 forecast due in December, as they are prone to revisions over time.
"However, if such estimates over time prove to be robust, then this might be justification for monetary policy action," said Dolenc, who has been heading the central bank all year as political gridlock is preventing the appointment of a permanent governor.
Advocates of further policy easing argue that inflation could undershoot the target as political turmoil in France will weigh on growth, the strong euro curbs imported inflation and Chinese firms, facing sharply higher tariffs in the U.S., could dump surplus goods in Europe.
But Dolenc pushed back on each of these points, arguing that growth and inflation were both on a good track, even if uncertainty was unusually high.
He acknowledged that French turmoil could push up interest rates and spreads in case of escalation but there has been nothing disorderly or unwarranted in market movements so far. In any case, the ECB has all the tools it needs to fight turmoil, if it threatened its mandate, Dolenc said.
France has been in political turmoil for weeks as a shaky government is trying to consolidate public finances via unpopular tax hikes and spending cuts, reining in a budget that has been on an unsustainable course for years.
Chinese dumping has not been a problem either and the euro's course has not significantly deviated from the long-term equilibrium in the exchange rate, Dolenc said.
"So far there has been no evidence of major shifts in Chinese exports to Europe, but we need to stay vigilant because this could potentially have an effect on inflation," Dolenc said.
(Reporting by Balazs Koranyi; Editing by Andrea Ricci)
