ECB’s Nagel: June Rate Cut Doesn’t Necessarily Lead to Subsequent Reductions

22 May 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Governing Council member Joachim Nagel late Tuesday said that a possible first interest rate cut in June did not mean that others would follow immediately, as there was still some level of uncertainty.

In a joint interview with Italian daily Corriere della Sera, Spanish daily El Mundo, German business daily Handelsblatt and French daily Les Echos, Nagel, who heads the German Bundesbank, said, ‘[E]ven if interest rates are cut for the first time in June, that does not mean that we will cut interest rates further in subsequent Governing Council meetings. We are not on autopilot. There is still great uncertainty about future economic and price developments.’

Cutting interest rates in June would be plausible if the ‘Governing Council's latest assessment is confirmed by incoming data and our upcoming projection’, he said, adding that the decisions would be taken meeting by meeting.

Even acknowledging that the ECB ‘could be ready for a first rate cut’, Nagel called for caution so as not to endanger the progress that had been made.

‘Broadly speaking, I expect inflation to continue to fall toward our 2% target and reach it in 2025. But we must remain cautious’, he said. ‘We should not cut interest rates too quickly and jeopardise what has been achieved.’

Asked when interest rates would be below 2.5% again in the euro area, he said that he could not know because of the high level of uncertainty.

Wage growth ‘seems to be going in the right direction’, and was expected to moderate as disinflation continued, but there were still uncertainties, he said.

‘Stronger wage growth can translate into greater price pressure. We need to keep a close eye on wage growth, corporate profit margins and their impact’, he said.

There were no signs of a self-reinforcing wage-price spiral, even with wages catching up and regaining purchasing power, he said.

Some of the factors that could put upward pression on inflation on the long term were the costs of diversifying supply chains and labour shortages as populations aged, he said.

‘Of course, monetary policy at the euro area level must respond to such developments’, he said. ‘That's something we're keeping an eye on.’

The ECB would closely monitor the possible impact of the United States Federal Reserve’s monetary policy, Nagel said, noting that its ‘task is to ensure price stability in the euro area.’

‘Of course, US monetary policy has spill-over effects. For example, the dollar can appreciate, which makes many raw materials and imports from the USA more expensive and thus leads to inflationary pressure in the euro area’, he said. ‘So there are certainly some indirect effects. We are watching the data closely. The data and our outlook drive our assessments, not the Federal Reserve's decisions.'