The European Central Bank (ECB) has the capacity to gradually reduce borrowing costs to levels that no longer hinder economic activity, but should exercise caution against excessive easing, according to Governing Council member Joachim Nagel.
With euro-area inflation slowing largely as projected, Nagel suggests that “interest rates should converge slowly and at a measured pace toward neutral territory,” emphasizing the need to avoid hasty action. He expressed confidence in the current trajectory of inflation, stating that he doesn’t foresee a significant risk of undershooting that would necessitate expansionary measures from the Eurosystem in the near term.
ECB President Christine Lagarde speaks at a press conference.
The ECB is widely anticipated to implement a fourth quarter-point rate cut at its December meeting, with some investors speculating on a more substantial reduction given the current economic climate of subdued growth and inflation nearing the 2% target.
Nagel acknowledged the difficulty in defining “neutral territory,” the point at which interest rates neither stimulate nor restrict the economy. He views this uncertainty as further justification for a cautious and gradual approach to policy adjustments. This sentiment aligns with recent remarks from Executive Board member Isabel Schnabel, who cautioned against venturing into expansionary rate territory due to potential adverse effects.
ECB Governing Council member Joachim Nagel speaks at a conference.
Conversely, more dovish officials like Francois Villeroy de Galhau of France and Italy’s Fabio Panetta have suggested that the ECB should not dismiss the possibility of expansionary measures. Luxembourg’s central bank chief, Gaston Reinesch, echoed expectations of a 25 basis-point cut in December, barring significant negative surprises in upcoming growth and inflation projections. He further suggested that with disinflation on track and the 2% target likely within reach next year, further gradual cuts in 2025 appear appropriate. Latvia’s Martins Kazaks also anticipates a December rate reduction.
On the eve of the ECB’s quiet period before the policy meeting, President Christine Lagarde indicated the likelihood of further borrowing cost reductions, but refrained from specifying the timing or magnitude of such adjustments.
Nagel indicated a willingness to continue reducing policy rates at the December meeting, pending review of the latest macroeconomic projections and assessment of associated risks.
Addressing the German economy, Nagel painted a bleak picture of continued weakness and a dim outlook, with no major demand components suggesting a significant short-term recovery. He emphasized the importance of carefully considering all available data before making a final decision on the appropriate course of action. The upcoming macroeconomic projections and a thorough risk assessment will be crucial in informing the ECB’s decision-making process.
