European Central Bank Governing Council member Nagel: Caution is needed when cutting interest rates as they approach neutral levels
European Central Bank Governing Council member Nagel stated that the central bank should not rush to cut interest rates, especially when rates are close to neutral levels. He pointed out that a gradual policy approach is more appropriate. The current neutral interest rate is 1.8%-2.5%, while the deposit rate is 2.75%. Although the market expects interest rate cuts, the inflation rate has not yet reached the target, and Nagel believes the target will be achieved by mid-year. He warned against overly relying on estimates of the neutral rate, emphasizing the need to consider multiple indicators for decision-making
According to the Zhitong Finance APP, Joachim Nagel, a member of the European Central Bank's Governing Council and President of the German Central Bank, stated on Wednesday that the European Central Bank should not rush into further interest rate cuts, especially as borrowing costs approach a level that neither restricts nor stimulates the economy.
Nagel said, "The closer we get to the neutral interest rate, the more appropriate it is to adopt a gradual policy." According to calculations by the German Central Bank staff, the neutral interest rate is between 1.8% and 2.5%, slightly below the current deposit rate of 2.75%.
Nagel stated, "In the current uncertain environment, there is no reason to act hastily." He added, "The data will tell us where to go."
Since June of last year, the European Central Bank has cut the deposit rate by 125 basis points. Although analysts and investors are betting that the European Central Bank will cut rates again next month, the situation after March remains unclear, and discussions among policymakers have become increasingly intense.
The inflation rate in the Eurozone rose to 2.5% in January, and it is expected to remain at the target level of 2% until 2025. However, some officials are concerned about the upward risks posed by rising energy costs and trade tariffs, while others worry that a weak Eurozone economy could keep inflation below the target level.
Nagel stated, "We have not yet reached the inflation target, but I am very confident that we will reach the target by mid-year, so this is good news. The likelihood of inflation being below the target level is low."
Inflation data in the U.S. for January exceeded expectations, indicating that global price risks persist, prompting traders to lower their bets on the extent of interest rate cuts by the European Central Bank for the remainder of this year to 75 basis points.
European Central Bank officials hold differing views on the exact position of the neutral interest rate. The updated estimate from the European Central Bank staff last week was between 1.75% and 2.25%, but they warned against relying too heavily on this concept.
Nagel stated that basing monetary policy decisions on uncertain neutral estimates is "risky" and emphasized that the European Central Bank uses various financial, real economy, and other indicators to make assessments.
However, he referred to the neutral interest rate as "very useful" because "it indicates when we need to be more cautious about changes in policy rates to avoid making a misstep."
He also warned against simply choosing the midpoint of any range, as this "may not be a satisfactory midpoint."