Bundesbank President Joachim Nagel warns against cutting interest rates in the euro zone too early. Recently, the head of the ECB, Christine Lagarde, also spoke of a persistent risk of inflation.
For Bundesbank boss Joachim Nagel, an interest rate cut by the European Central Bank (ECB) would come too early at this point. Despite the recent decline in inflation, it would be premature to cut key interest rates soon or speculate about such steps, Nagel said at a Central Bank of Cyprus event in Nicosia. According to the Governing Council member, the main impact of the recent monetary policy tightening on inflation has yet to become apparent.
Although the monetary authorities did not raise the key interest rate further in October, they had previously carried out ten interest rate increases in a row in order to get the high inflation in the currency area under control. The ECB’s key interest rate is currently 4.5 percent. Inflation in the euro zone recently fell from 4.3 percent in September to 2.9 percent in October. The inflation rate reached its peak in October 2022 at 10.6 percent.
“There is still a journey ahead of us”
In recent months, Bundesbank boss Nagel has repeatedly pointed out the risks of persistently high inflation and in this context spoke of a “greedy beast” that has not yet been defeated. “Although inflation has fallen significantly in recent months, we cannot assume that the decline will continue,” warned Nagel.
The positive effect of lower energy prices has weakened and inflation is still above the ECB’s medium-term target of two percent. The road is likely to be bumpy.
Even according to ECB President Christine Lagarde, the risk of inflation has not yet been overcome. It is not the time to declare victory over inflation, Lagarde said last week. The head of the central bank also referred to rising wages and their possible impact on price developments. “There is still a journey ahead of us,” said Lagarde.
Markets too optimistic?
Belgium’s central bank chief Pierre Wunsch, who is also a member of the ECB’s Governing Council, recently did not rule out a further increase in key interest rates by the ECB. The markets would take an “optimistic” view if they no longer expected any further hikes and even speculated on a first interest rate cut in April next year, Wunsch told the financial news agency Bloomberg.
“Representatives of the US Federal Reserve and the European Central Bank have recently tried to convince market participants that monetary policy must be sufficiently restrictive for a longer period of time and that interest rate cuts are not currently under discussion,” observe the market experts at Helaba. Nevertheless, the first steps are expected by the middle of next year at the latest. “Whether this is premature depends largely on whether the disinflationary trend continues and the monetary authorities can point to the fact that inflation is approaching the target value,” says Helaba.