Piero Cipollone: Interview with Expansión

24 March 2025

The last ECB Governing Council meeting left the door open for a pause in interest rate cuts, or even stopping them all together. Would you be OK with rates remaining at their current level of 2.5%?

At the time of our March meeting, markets were pricing in a reduction in interest rates over the coming months, including going below 2%, with rates stabilising around that level. To produce our macroeconomic projections we take as given the rate path being priced in by markets and, despite rates being on a downward trajectory, the projections showed inflation converging towards our target at the beginning of 2026, with slightly weaker growth.

Since then, not only has this narrative been confirmed, but key issues have arisen that have strengthened the arguments in favour of continuing to lower rates. First, energy prices have fallen significantly. The upward revision to projected inflation for this year was based on increased energy costs, but the pressure has eased as this trend reverses. Second, the euro has appreciated and real rates have increased, which contributes to lower inflation.

And if the United States were to impose tariffs on European exports, that would have a negative impact on demand, which would further strengthen the downward trend in inflation. In the same vein, trade tensions between China and the United States could lead to China redirecting its products to the European market, increasing the downward pressure on prices.

So will you continue cutting rates?

We will go into each meeting with an open mind, assessing the available data and taking decisions on a meeting-by-meeting basis. Each adjustment will depend on how the economy evolves and how the uncertainties are resolved, but current conditions make it conceivable that monetary policy will be less restrictive as, at the moment, the outlook remains consistent with our March projections.

In fact, according to the data we have available, we are likely to reach our inflation objective sooner than our latest projections indicate.

The ECB’s latest statement signalled that monetary policy is now “meaningfully less restrictive”. Does this solely refer to the rate cuts that have already happened, or might it give us some hints about your next moves?

That phrase alludes to the fact that we have already come a long way. It doesn’t say anything about the future, and we will go into the next meeting with new data that we will have to assess. If the path and our narrative are confirmed, from my perspective there is room to relax our monetary policy further.

Would additional rate cuts get us to the famous, much-debated “neutral rate”, which is neither expansionary nor contractionary?

It’s an interesting theoretical concept, but not particularly useful for conducting monetary policy. At the ECB we have sophisticated models and economists who analyse projections and risks. Their work provides crucial information that enables the Governing Council to take decisions on the basis of sound evidence. The neutral rate sparks an engaging debate, but the range [from 1.75% to 2.25%] is so wide that, depending on where you fall within this apparent neutral range, you could be conducting a totally different monetary policy.

Europe currently needs substantial investment to tackle the climate transition and the loss of competitiveness, and now also for defence. Can the ECB help to mitigate this challenge?

The ECB will contribute by providing a stable environment. For us, price stability and the expectation of price stability are essential elements because they encourage long-term planning. Families and businesses can plan, invest and take decisions accordingly.

We are considering climate change, competitiveness and security challenges and the associated financing needs from that angle, analysing their economic and financial impact from the perspective of price stability. Aside from that, we’re getting into areas that aren’t within the ECB’s mandate.

In any case, it’s important to avoid monetary policy keeping GDP growth below potential if that isn’t necessary to control inflation. If we are continually growing below potential we will end up undermining that potential. Investment is essential for supporting and growing the economy, and unnecessarily reducing investment can hamper long-term growth and make the economy more vulnerable to shocks.

So, in this sense, our main contribution will be maintaining price stability, securing a stable economic environment and avoiding unnecessary restrictions on GDP growth.

Recently you have signalled that the ECB shrinking its balance sheet could make monetary policy more restrictive and demand larger rate cuts.

It’s more complicated than that. The large asset purchases we carried out in the past lowered long-term sovereign bond yields by as much as 175 basis points. Now, because of the reduction in the size of our balance sheet, this figure is 75 basis points and falling.

But there’s another important factor. It’s not just about the size of central bank reserves, it’s also about their composition. ECB research shows that the composition of these reserves is very important for banks’ lending ability. The research estimates that debt portfolio holdings (under the ECB’s asset purchase programme (APP) and pandemic emergency purchase programme (PEPP)) will decrease by around €500 billion in 2025. This is associated with a possible €75 billion decline in credit supply. To put this into perspective, it is roughly equivalent to the amount of loans that banks granted to non-financial corporations in 2024.

Therefore, we should bear in mind that, if nothing else happens, the reduction of the central bank balance sheet is putting pressure on banks’ lending capacity. So we need to monitor this effect and take it into consideration when calibrating our monetary policy stance.

Growth in Spain is stronger and inflation is somewhat higher. Is the country at risk from the interest rate cuts?

Inflation in Spain is currently slightly higher due to energy prices, and the stronger growth is in part also driven by supply factors, such as the impact of migration on the labour market. I think Spain’s growth is healthy.

In any case, there have always been differences between euro area economies, and between regions in individual countries. The important thing is that there is convergence in economic and financial conditions, and we are actually seeing that in many respects. For example, despite all the volatility, risk premia have remained relatively contained.

What is the current status of the digital euro?

We are progressing as planned with our preparation phase, which will come to an end in October this year. We have been working on selecting providers. We’ve carried out the procurement process with potential suppliers and are about to finalise it. We are also developing the rulebook, and we’re working on ways to engage more with users.

In the meantime, we are waiting for the legislative process to be completed. That is a key component.

Are you optimistic?

We know that progress has been made and we hope that the process will be concluded within a reasonable amount of time.

One factor is important: there is a growing sense of urgency. The situation outside the euro area is a source of pressure and demands greater consideration of the risks we face in payments as a result of our fragility and our extreme dependence on foreign providers. I have the impression that this increased sense of urgency has now reached the legislators.

At the European Parliament, President Lagarde argued that the digital euro is a tool of sovereignty. Would you agree with that?

I fully agree with that statement. The digital euro is a structural necessity for the European payments market, irrespective of recent developments in other countries. However, recent events further underline the urgent need to make progress in this direction.

The digital euro is key to reducing our foreign dependence as regards Europeans’ everyday payments. In addition, having more solutions across Europe will make us more competitive, which will lead to lower prices, better services and greater innovation.

At a time of tensions between the EU and the United States, don’t you think that a public initiative designed to compete with US payment systems could cause further friction?

I don’t think so, because it’s logical to think that each jurisdiction should have its own infrastructure that it can rely on. Payments are like water or electricity – essential services that every economy needs to ensure are available. In developing a digital euro, we are not seeking a confrontation with anyone. Implementing a digital euro is something that we should have done irrespective of the circumstances. It is about ensuring the resilience of our economy and that we are the master of our own destiny.

The United States has abandoned plans for a digital dollar and other countries have also put their projects on hold. Why do you think the digital euro should go ahead?

Every country and every region has its particular characteristics. In Europe we are facing specific challenges, like a fragmented payments market and a dependence on foreign solutions. Other countries and regions do not have the same problems and so may not see the same need.

In any case, in the United States, there is a proposal that would allow stablecoins to hold their reserves with the Federal Reserve. This could be marketed as a form of hybrid digital dollar. In fact, some stablecoins present themselves as the world’s digital dollar.

When will people be able to pay with digital euro?

It very much depends on when the legislative process is finalised. The technical preparations and developments will take time, both on our side and for banks and the market. This could take some two or two-and-a-half years from the moment the decision to issue a digital euro is taken, once the legislation is in place.

Do you have an estimate of the cost of the project?

As the legislation is still pending and the procurement phase has not yet been finalised, it is difficult to say what the final cost of the project will be. In the procurement documentation we gave an initial estimate for the elements that will be sourced externally. This was based on market research we had carried out previously. These costs are estimated to be €432 million, including both the infrastructure and the operation of the system for 10-15 years. On top of that there will also be internal development costs, especially for the ledger. The ECB would bear these costs in the same way as it does for the production and issuance of banknotes. And like for banknotes, these costs would be covered by the seigniorage income generated by the digital euro.