European Central Bank member: Close to achieving the 2% inflation target, but the future interest rate path remains highly uncertain

According to the Zhitong Finance APP, Joachim Nagel, the President of the German Central Bank and a member of the European Central Bank's Governing Council, stated that the European Central Bank is about to achieve its 2% inflation target, but high uncertainty makes it impossible to predict future interest rate trends, necessitating maximum flexibility.

The German Central Bank president said in Mannheim on Tuesday, "The target is finally within reach." "We are on the right track, although the road remains bumpy," referring to the recent rise in core inflation and service sector inflation.

Nagel mentioned that it is still too early to judge whether officials will cut rates again at the next meeting in less than two weeks, highlighting the European Central Bank's reliance on data and its approach of making decisions at successive meetings.

"If we have not long practiced this flexibility, we must now introduce it, as it is currently impossible to reliably commit to a specific interest rate path," he stated.

France's inflation rate fell to just 0.6% in May

As inflation recedes and the economy faces headwinds from U.S. tariffs, the market widely expects the European Central Bank to lower borrowing costs on June 5. In addition, some officials are open to reducing the deposit rate below 2%—a level generally considered neither to suppress nor stimulate economic activity—while others urge caution, pointing to potential price pressures in the future.

After U.S. President Trump threatened to impose a 50% tariff on the EU starting June 1, investors increased their bets on easing policies, expecting at least one more rate cut after next month's reduction. Despite Trump extending the negotiation deadline to July 9 on Sunday, investors maintain this expectation.

Nagel emphasized that Trump's policies are a major driver of uncertainty. He stated that while trade tensions will suppress growth in Germany and the Eurozone, the impact on inflation remains unclear.

The Eurozone economy unexpectedly grew by 0.3% in early 2025. However, it has yet to feel the full impact of U.S. tariffs. Last week's data showed that private sector activity unexpectedly contracted in May, with the service sector recording its worst performance in 16 months.

Despite the inflation rate remaining at 2.2% in April due to increased core price pressures, analysts expect a reversal in May—potentially pushing the inflation rate even below 2%. The European Commission forecasts an average inflation rate of only 1.7% next year.

The European Central Bank will announce its forecasts at the June meeting. Nagel warned that trade uncertainty means these forecasts will be "built on a less stable foundation than usual."

"In terms of economic growth, at least the direction seems clear," he said. "Germany and the entire Eurozone may suffer significant losses due to U.S. tariff policies."

In early 2025, Germany's economic growth was unexpectedly strong.

At the same time, inflation "could be higher or lower than recent expectations, depending on how trade disputes develop, as well as other factors such as exchange rates, service prices, and fiscal plans," he stated.

Whether fiscal plans will exacerbate price pressures will depend on how the additional funds are used, their velocity, and what is imported from abroad.

"These hard-to-quantify factors make forecasting difficult," Nagel said. "However, given the recent period of high inflation, it is even more important to maintain stability in consumer price growth expectations."

He noted that some indicators measuring medium-term expectations among households and businesses have recently risen again.

"Worries about tariff policies leading to price increases seem to be troubling not just Americans," Nagel said. "We will closely monitor this situation."