European Central Bank Governing Council: Economic Uncertainty Remains High, Should Not Commit to Further Rate Cuts or Rule Them Out

Member of the European Central Bank Management Committee and President of the German Central Bank Joachim Nagel stated that given the current high level of economic uncertainty, the European Central Bank must maintain an open attitude towards all options, neither committing to nor ruling out further interest rate cuts. Joachim Nagel stated on Wednesday, "We can fairly say that we are currently in a favorable position to deal with further developments." "But it is unwise to commit to a certain interest rate path, anticipate the next steps, or even completely rule it out." As one of the more hawkish members of the European Central Bank Management Committee, Joachim Nagel pointed out, "High uncertainty will not disappear quickly," therefore, the European Central Bank "should proceed cautiously and make decisions at each meeting based on data." With the inflation rate having fallen back to the target level of 2%, and the resilience of the Eurozone economy to headwinds from factors such as trade and conflicts so far, European Central Bank officials have hinted that the eight interest rate cuts of 25 basis points each that have been implemented may be nearing an end. However, some officials are still open to further easing. The market expects at least one more interest rate cut from the European Central Bank this year. Several policymakers, including Francois Villeroy de Galhau, President of the French Central Bank, are concerned that inflation may continue to stay below the European Central Bank's 2% targetespecially if the Euro further strengthens. European Central Bank Vice President Luis de Guindos stated last week that if the Euro rises above 1.20 against the US dollar, the situation will become "much more complicated." The European Central Bank's latest forecast shows that consumer price growth will remain below 2% in the next 18 months, and will only return to the target level in 2027. Joachim Nagel emphasized that the slight decrease in consumer price growth expected for 2026 is due to base effects. He stated, "Currently our inflation rate is around 2%, and what's more encouraging is that our experts predict that inflation will generally stay at this optimum level in the medium term." He added that service sector inflation continues to rise, so "caution should still be maintained," but recent downward trends are encouraging. Regarding the European Central Bank's monetary policy strategy review, Joachim Nagel stated that he "appreciates" the clear statement that policymakers will react with the same determination when inflation is significantly above 2%, not just when it is too low. The strategy review confirmed the 2% symmetric inflation target and emphasized that the European Central Bank will use "moderately strong or sustained" policy responses in the event of significant and sustained deviationsfocusing more on low inflation in 2021. Furthermore, Joachim Nagel reiterated that "large-scale asset purchases should always be the absolute exception," citing risks to the central bank's balance sheet composition. While European Central Bank policymakers retain all tools, including quantitative easing, as part of the policy toolkit, they did not specify the circumstances under which these tools should be used. However, from the evaluation report and comments from some officials, it appears that future use of quantitative easing may be more cautious, given the chain effects it brings such as central bank losses and asset bubbles.