European Central Bank (ECB) Chief Economist Philip Lane said in a speech at the “2025 WE_ARE_IN Macroeconomics and Finance Conference” in Frankfurt that the sell-off in U.S. Treasury securities and the weakening of the dollar during tariff turbulence have made it even more difficult for Eurozone banks to rely on dollar-denominated liquid assets.
Lane warned that if dollar funding were to be cut off, banks in the Eurozone could come under pressure and might be forced to restrict the credit they provide to the economy.
“At the same time, the combination of significant off-balance-sheet dollar exposures and volatile funding means that sudden changes in these net risks cannot be ruled out,” Lane said.
He argued that if these two factors were to coincide, both sides of bank balance sheets would come under pressure, leading to downward pressure on balance sheet risks such as loans to the real economy.
Commenting on the transmission of the ECB’s interest rate policy to the economy and the financial system, Lane said, “Overall, the transmission of monetary policy is functioning smoothly.”
He also emphasized that it makes sense to assess the strength of monetary policy transmission at any given time, on a session-by-session basis, and in a data-dependent manner.
ECB’s Interest Rate Cuts
Meanwhile, the ECB had cut the deposit rate eight times since June 2024 but paused the reductions in July and September. The deposit rate currently stands at 2 percent.
The ECB’s Monetary Policy Committee meeting scheduled for October 30 is now the main focus of investors.
