In London and Frankfurt on February 12th, Reuters reported that Bundesbank President Joachim Nagel stressed the importance of the ECB gradually easing policy without focusing on a precise "neutral" interest rate, while also emphasizing preparedness to address global trade tensions.
Amid concerns over the economy, the ECB has reduced interest rates five times since last June, prompting speculation about potential further cuts from the current 2.75% benchmark rate.
Nagel expressed skepticism towards the concept of the neutral rate, believed by economists to sustain balanced growth, pointing out the difficulty in determining its exact threshold, which some estimate around 1.75% to 2.25%.
Speaking at an event in London, Nagel underscored the need for a cautious approach as the ECB nears the neutral rate, cautioning against solely relying on "r-star" estimates due to their inherent risks and uncertainties.
Nagel presented the Bundesbank's neutral rate estimate range of 1.8% to 2.5%, indicating that the next rate adjustment could bring the ECB closer to neutrality or may require several subsequent steps.
Given the economic uncertainties, particularly in light of potential U.S. tariffs, Nagel emphasized the importance of data-driven decisions to safeguard against adverse outcomes like inflation falling below target, a scenario he considered less likely presently.
Anticipating the ECB's upcoming meeting on March 6, where a rate cut to 2.5% is expected, Nagel cautioned against excessive optimism, highlighting potential challenges ahead, including the risk of escalating trade tensions necessitating further rate adjustments.
Addressing the need for reform in Germany and Europe to enhance economic competitiveness, Nagel advocated for substantial revisions to the fiscal debt brake mechanism and accelerated development of a digital euro by the ECB to bolster the euro zone's financial stability amid evolving global dynamics.
Nagel emphasized the imperative of collective action within Europe to mitigate the widening transatlantic divergence resulting from divergent policy trajectories pursued by the U.S. and European economies.