By Divya Chowdhury and Francesco Canepa
MUMBAI (Reuters) -A weaker euro falling to parity with the U.S. dollar would cushion the impact of any new U.S. tariffs on euro zone growth although it would push up inflation, European Central Bank policymaker Pierre Wunsch told Reuters on Wednesday.
The Belgian central bank governor said in an interview with the Reuters Global Markets Forum that four more ECB rate cuts next year were a “meaningful” scenario, but he was open to taking a different path if inflation and growth data required it.
The ECB cut rates last week on the back of a gloomier outlook and policymakers said the bank’s already lowered projections for growth could prove too optimistic if U.S. President-elect Donald Trump’s incoming administration imposed new tariffs on euro zone imports.
But Wunsch said a lower euro exchange rate against the greenback would help take the edge off of a protectionist turn in U.S. trade policy.
“We’ve already seen the euro depreciating maybe 4 or 5% against the dollar,” he said. “So it would only take the euro to go to parity for a 10% tariff to be essentially compensated.”
On the flipside, a weaker currency would push up inflation by making imports more expensive, Wunsch cautioned.
The Belgian governor, in the past seen as a hawk who favoured higher rates, said he expected the ECB’s policy rate, currently at 3%, to fall by another percentage point if the ECB’s projections for inflation to settle at its 2% target materialise.
“I guess we will land at somewhere around rates of 2% on the basis of our forecast,” he said.
He added that market bets on four more ECB rate cuts worth 25 basis points each in the next four meetings were broadly in line with the central bank’s thinking.
“I am comfortable with it as a scenario that I find meaningful,” he said. “It’s relatively aligned to ours. But that’s give or take.”
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