ECB’s Nagel: Interest Rates Will Not Fall as Quickly and Sharply as They Have Risen

18 September 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Governing Council member Joachim Nagel on Wednesday said that the process of monetary policy easing would not be as abrupt as the previous tightening.    

In a lecture at the Commerzbank in Frankfurt, the text of which was posted to the website of the German Bundesbank, which he heads, Nagel said, ‘How exactly things will continue is unclear, but the key interest rates will certainly not fall as quickly and as sharply as they have risen! Depending on the incoming data, the time intervals between the potential steps may vary.’ 

Monetary policy must remain sufficiently tight for price stability to be restored in a timely manner, he said.  

It was important to him to see 'inflation stable at the target value of 2% as soon as possible', he said, as part of which the ECB would not commit in advance to future interest rate decisions.  

'Instead, we will continue to examine new data with an open mind', he said. 'We are not operating on autopilot when it comes to interest rate policy.' 

There had been good process towards price stability, especially when it came to inflation expectations, he acknowledged.  

'As part of the disinflation process, inflation expectations have also declined as desired, and the risk of higher inflation expectations has decreased according to the assessment of markets and experts surveyed', he said. 'This suggests that inflation expectations are well anchored.' 

The decline in Eurozone inflation in August was mostly due to energy prices, he said, adding that wage pressures were still challenging.  

'The slow decline in wage pressure is making the disinflation process sluggish', he said. 'At the moment, inflation is not yet where we in the ECB Governing Council want it to be' 

The latest ECB forecasts saw an increase in productivity that would contribute to fighting inflation, he said.  

'The new projections include an increase in labor productivity of around 1% in the euro area in 2025 and 2026, after stagnation in the current year and a decline of almost 1% last year', he said. 'This itself would dampen unit labor costs and, through it, inflation.' 

The growth forecast, however, was only modest, he said.  

'The outlook is uncertain, especially in view of the ongoing tense geopolitical environment', he said.  

From this day, the spread between the main refinancing rate and the deposit rate would narrow from 50bp to 15bp, he highlighted.  

'This operational adjustment will provide an incentive to bid on the weekly tenders. As a result, short-term money market rates are expected to remain close to the deposit rate, with limited fluctuations', he said.