(Bloomberg) -- Inflation that’s headed toward the European Central Bank’s target will allow for more interest-rate cuts, but officials mustn’t rush, Governing Council member Joachim Nagel said.
“Since inflation in services should gradually decline as wage pressures decrease, the point at which we can expect a sustained return to the 2% mark is approaching,” the Bundesbank president said Monday.
However, “it is important to remain cautious and to loosen monetary policy only gradually and not too quickly,” because there are still risks to the consumer-price outlook, he said at an event in Dortmund, Germany.
His comments come less than three weeks before the ECB’s final policy meeting of 2024, at which officials are widely expected to deliver another rate reduction, with some investors and economists even speculating about a 50 basis-point move after disappointing growth data on Friday.
Inflation in the 20-nation bloc probably accelerated to 2.3% in November, the fastest level in four months, according to economists surveyed by Bloomberg. But the ECB expects a sustainable return to the 2% target over the course of 2025, likely in the first half of the year.
Nagel, one of the more hawkish officials, said that the ECB will only decide in December whether there’ll be another move — based on the data available at that time and new staff projections.
But he said that policymakers are “convinced that even with lower interest rates we will soon and permanently reach our inflation target,” referencing the ECB’s three reductions since June.
Like all monetary policy measures, lowering borrowing costs only take effect after a delay, he said.
“It would therefore be too late to wait until the targeted inflation rate has been reached to ease policy,” he said, adding that rates are still restrictive at the moment.
But lingering price risks call for prudence, he said, listing possible stronger-than-expected wage growth and elevated core inflation.
There is also “a very real risk” that the new US administration will take trade policy measures that will also result in higher inflation in the euro area, he said. President-elect Donald Trump has threatened new trade levies for China and other countries.
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