ECB’s Nagel: ‘A Timely Return to Price Stability Cannot Be Taken for Granted’

29 August 2024

ECB’s Nagel: ‘A Timely Return to Price Stability Cannot Be Taken for Granted’
- Nagel: ‘Core Inflation, Especially Services Inflation … Is a Matter of Concern for Us’
- Nagel: ‘We Need to Be Careful and Must Not Lower Policy Rates Too Quickly’
- Nagel: ‘Not Yet Fully Through the Period of Heightened Inflation’
- Nagel: ‘Stronger Economic Recovery Could Further Delay the Return to Our Target’

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Governing Council member Joachim Nagel on Thursday called for caution in reducing interest rates, given that the return to the ECB's inflation target was not guaranteed.

In a speech at the Central Bank Research Association (CEBRA) Annual Meeting in Frankfurt, the text of which was posted to the website of the German Bundesbank, which he heads, Nagel said, ‘Taken together, a timely return to price stability cannot be taken for granted. Therefore, we need to be careful and must not lower policy rates too quickly.’

Core inflation was still at elevated levels, which was a reason for concern even with headline inflation down to around 2.6% in the past months, he said.

‘We are not yet fully through the period of heightened inflation – even though we may see headline inflation come close to target for a time in late summer’, he said.

The Governing Council’s September meeting would benefit from new projections and new data, which would be thoroughly analysed to determine whether they ‘corroborate our expectation of a timely return to our 2% target’, he said.

Despite the improved medium-term inflation outlook that allowed a first rate cut in June, ‘a cautious approach is warranted’, he said.

If the labour market remained tight for longer than expected or if the economic recovery were somewhat stronger than anticipated, there was a risk that the return to the inflation target could be delayed, he said.   

‘Above all, we are not there yet’, he warned. ‘While our 2% target is in sight, we have not reached it.’

Due to their ‘notoriously uncertain’ nature, the estimates for the natural rate of interest, r*, should not guide the ECB’s decisions, he said.

‘It would ... be unwise to rely too much on the natural rate of interest when making decisions of monetary policy’, he said.