By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member Joachim Nagel said on Monday that there was no need to adjust the ECB’s monetary policy stance even if inflation fell below the 2% target in the coming months.

In a speech at the Monetary and Financial Economics Colloquium, organized by the Karlsruhe Institute of Technology, Nagel said that the outlook from the December 2025 projections was largely confirmed at the February meeting using technical assumptions for oil prices, exchange rates and market interest rate expectations.

“The recent appreciation of the euro against the US dollar is also unlikely to materially change this assessment,” he added.

Nagel noted that risks to inflation were “roughly balanced” and that long-term inflation expectations were “firmly anchored” to the 2% target.

Regarding core inflation, he said that services was still a key driver of price increases and described inflationary pressures stemming from wages as “persistently high”, observing that experts expected wage growth at 3% in the coming years.

“Taken together, the potential for inflation to fall below the 2% mark in the coming quarters is, firstly, quantitatively small and, secondly, primarily attributable to volatile energy prices,” he said. “At the same time, price stability is ensured in the medium term, and long-term inflation expectations are firmly established.”

In recent years interest rate cuts and hikes had been transmitted to households and firms largely in line with historical patterns and there was no reason to believe that would not remain the case, he said.

The ECB would react if inflation was projected to deviate “sustainably and noticeably” from the 2% target in the medium term, according to Nagel, who said that “[s]mall, temporary deviations – especially in volatile components such as energy prices – do not, however, require a change of course if inflation expectations are firmly established.”

This applied to the current situation, he said, in which he acknowledged that inflation could undershoot the 2% target, but would also apply if inflation overshot.

He said there were several reasons to view the current level of interest rates as “appropriate.”

In particular, he noted that the inflation deviation was likely to be short-lived and limited, that inflation was expected to remain at target in the medium term, that long-term inflation expectations were firmly anchored, that core inflation pointed to price stability being achieved over the medium term, and that monetary policy transmission was unfolding as expected.

The ECB’s “steady-hand policy” had proven to be “successful” and therefore should remain, he said.

“Even if the inflation rate falls slightly below our target in the coming quarters, there is therefore no immediate need for action,” he said. “This does not mean, of course, that we will no longer adjust our monetary policy or change interest rates.”

The ECB would continue to keep a close eye on new data and was ready to react in either direction if necessary, he said.

 

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