The European Central Bank (ECB) has scope to further cut its key interest rates as inflation moves closer to its target, but it should remain vigilant about potential upside risks, according to Christodoulos Patsalides, governor of the Central Bank of Cyprus and ECB Governing Council member.

With the eurozone economy showing signs of slowing and potentially proving weaker than forecast, Patsalides told Bloomberg in an interview that the same cannot be said for price pressures.

As a result, he urged caution in withdrawing the ECB’s tight monetary policy too soon.

“If there are no upward inflation surprises, then we can and should continue lowering rates,” Patsalides said from Washington, where he was attending the annual meetings of the International Monetary Fund (IMF) and the World Bank.

He added that December will be a key month, as more data, including economic growth forecasts, will become available.

“We will be in a better position to assess our stance,” he said.

After the ECB’s second consecutive rate cut and rising expectations of another reduction in December, Patsalides advocated for gradual steps rather than “sharp reductions” to avoid volatility and uncertainty.

So far, the ECB has opted for a steady pace, lowering rates by 25 basis points.

A larger 50-basis-point cut would only be justified “if the situation deteriorates significantly,” Patsalides said, emphasising that while the eurozone economy is slowing, it is heading for a “soft landing,” avoiding a full-blown recession.

“However, there are risks, including geopolitical tensions,” he concluded.