(Bloomberg) -- The European Central Bank can continue lowering borrowing costs as confidence in inflation moderating to the 2% target rises, but shouldn’t hasten further moves, Executive Board Member Isabel Schnabel said.
In a speech in Paris, the German official described risks to the outlook for consumer price as “broadly balanced.” Following four reductions in 2024, interest rates are nearing levels that neither restrict nor stimulate economic expansion, she said.
“Price stability is within reach,” Schnabel said Monday. “Lowering policy rates gradually towards a neutral level is the most appropriate course of action.”
ECB officials often use the word “gradually” to refer to quarter-point reductions in rates, rather than the 50 basis-point moves that other central banks have deployed and a small minority at the ECB proposed at the last meeting.
The ECB has signaled more monetary loosening though won’t commit to a particular path, citing elevated uncertainty. Analysts predict consecutive moves until the deposit rate — currently 3% — reaches 2%. Markets see it being decreased by even more, to 1.75%.
Earlier Monday, President Christine Lagarde said the ECB will continue lowering borrowing costs as the inflation spike of recent years increasingly moves into the rear-view mirror, bringing the target within reach.
Speaking to Bloomberg on Monday in Brussels, Belgian central-bank chief Pierre Wunsch said investor bets on rate cuts are broadly consistent with policymakers’ own assessments, describing inflation risks as “relatively balanced.”
While consumer-price growth ticked up in recent months, reaching 2.3% in November, it’s below the level the ECB expected just a few months ago, with projections suggesting it will hover around the 2% goal from the second quarter of next year.
“An important part of disinflation has yet to materialize,” Schnabel said, referring to still-elevated gains in services prices.
She also listed two other reasons to move gradually: New shocks that keep hitting the euro-area economy, “many of them posing upside risks to inflation,” and the fact that rates are “approaching neutral territory.”
At the same time, the euro-area economy is struggling to grow. While the services sector performance better than expected by this month, private business activity as a whole continued to contract, according to S&P Global’s Purchasing Managers’ Indexes.
“Growth has been revised down but is still expected to accelerate next year, as consumption and investment recover on the back of rising real incomes and less restrictive financing conditions,” Schnabel said.
She also said that once price stability has been restored, policy challenges will change. “As inflation becomes dominated by idiosyncratic shocks again, central banks can afford to be more tolerant of moderate deviations from target – in both directions,” Schnabel said.
“Given limited policy space, monetary policy should focus on responding forcefully to shocks that have the capacity to destabilize inflation expectations by pushing inflation measurably and persistently away from our 2% target over the medium term,” she said, adding that it can’t resolve structural issues.
--With assistance from Katharina Rosskopf.
(Updates with more comments starting in 10th paragraph.)
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