ECB may be nearing end of rate cuts but trade war is a risk, policymaker says

PARIS/FRANKFURT (Reuters) -European Central Bank interest rates may be close to bottoming out but uncertainty was high and the environment was prone to sudden changes that could also alter the policy outlook, ECB policymaker Martins Kazaks said on Friday.

The ECB has been cutting interest rates quickly over the past year and the debate over where to end the easing cycle is starting to gain prominence as the ECB's "baseline" forecast sees inflation settling around the 2% level.

"We are, by and large, within the baseline scenario," Kazaks told CNBC.

"And if the baseline scenario holds, then I think we are relatively close to the terminal rate already," he said. "A couple of more cuts may be (possible), but the important thing is to see where the trade talk and the trade story take us, and then of course we'll act," he said.

ECB board member Isabel Schnabel has already argued for steady rates while French policymaker Francois Villeroy de Galhau said he saw room for more easing.

Markets now see a roughly 90% chance of an ECB rate cut on June 5 but then price only one more easing over the rest of year, suggesting that the ECB's deposit rate could bottom out at 1.75%.

An escalation in the global trade war is a key risk but Villeroy said the ECB would not use interest rates to influence the value of the euro, turning a trade war into a currency war.

"Unfortunately, there is a risk of trade war, but a currency war would be a situation where each country is actively using its interest rates to try and gain an economic advantage. We are not at that point right now," Villeroy, who also heads the Bank of France, told regional French newspapers in an interview published on Friday.

"The current currency moves are more of a reflection on revisions to economic forecasts," Villeroy added.

(Reporting by Sudip Kar-Gupta and Balazs Koranyi; Editing by Cynthia Osterman and Tomasz Janowski)