(Bloomberg) -- The European Central Bank can gradually lower its borrowing costs to levels that no longer restrict economic activity but shouldn’t go too far, according to Governing Council member Joachim Nagel.
With euro-area consumer-price growth slowing largely as projected, “interest rates should converge slowly and at a measured pace toward neutral territory,” he said Wednesday in Luxembourg, adding that there’s no need to act “too hastily.”
Speaking at an event at the European Stability Mechanism, the Bundesbank chief also said that “as of now, I do not see a significant risk of inflation undershooting that would warrant the Eurosystem becoming expansionary in the near future.”
The ECB is widely expected to deliver a fourth quarter-point rate reduction at its final meeting of the year next week, with some investors even betting on a larger move — with inflation near the 2% target and the economy struggling to grow.
Nagel highlighted that the neutral territory, which neither stimulates nor restricts the economy, is “difficult to pin down.”
“This uncertainty is, in my view, another argument in favor of taking a cautious and gradual approach,” he said.
His comments echo remarks from Executive Board member Isabel Schnabel, who told Bloomberg last week that the ECB mustn’t go into expansionary rate territory as this could also backfire.
More dovish officials like France’s Francois Villeroy de Galhau and Italy’s Fabio Panetta, though, have said that the ECB shouldn’t exclude such an option.
Speaking at the same event as Nagel, Luxembourg’s central-bank chief Gaston Reinesch said it’s “reasonable to expect another 25 basis-point cut next week” as long as there are no major negative surprise in the new staff projections on growth and inflation.
He also said that disinflation in the euro area is well on track and the 2% target is likely to be sustainably reached next year. If that baseline holds, “further gradual cuts in 2025 seem appropriate,” he said.
Latvia’s Martins Kazaks also sees another rate reduction next week, telling IR in a separate interview that “my view is that rates should continue to decrease, with the next rate cut to follow in December.”
Earlier on Wednesday – the final day before a week-long quiet period preceding the ECB policy meeting – President Christine Lagarde said that borrowing costs are likely to be lowered further, without giving any guidance on the timing and extent.
What Bloomberg Economics Says...
“Members of the Governing Council are drawing battle lines for what will follow in 2025. While we don’t expect Lagarde to comment much on next year’s steps, the overall tone of her press conference is likely to be dovish – the outlook for inflation and GDP growth have both darkened since the ECB last met.”
—David Powell, senior economist. For full ECB preview, click here
Nagel said that at the moment he “would have no objections if we were to continue to reduce our policy rates” at the Dec. 11-12 meeting, but added he still awaits further information.
“I reserve my final judgment until I have reviewed the new macroeconomic projections for December and made up my mind concerning the risks surrounding the baseline,” he said.
Turning to the German economy, Nagel said that the overall economic performance remained weak recently, with the outlook bleak.
“Currently, none of the major demand components offer much reason to expect a significant short-term recovery of the German economy,” he said.
--With assistance from Aaron Eglitis.
(Updates with Kazaks in 11th paragraph)
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