Bundesbank Caution Urged about Further ECB Rate Cuts

Bundesbank President Joachim Nagel warned on Monday that the European Central Bank (ECB) should not rush into additional interest rate cuts, as eurozone inflation has now aligned with the official 2% target. “Decisions should continue to be data-driven and assessed on a meeting-by-meeting basis. There is no justification for premature action,” Nagel emphasized in a speech in Frankfurt.

Inflation Under Control and Recent Rate Cut

The ECB lowered its key interest rate to 2% from 2.25% in early June, marking its eighth cut since June 2024. This move was supported by data showing annual inflation at 1.9% in May—just below the institutional target. Nagel expressed optimism about the sustained stabilization of prices around 2%, stating that this supports the ECB’s medium-term inflation mandate.

Underlying Risks: Geopolitics and Tariffs

Despite the stabilization, Nagel warned of potential inflation risks, especially in the context of geopolitical uncertainty, including tensions in the Middle East. He also highlighted the potential impact of volatile energy prices, U.S. tariff decisions, and Germany’s fiscal easing, which may be driven by increased defense spending.

Mixed Factors: Price Pressures and Relief

According to Nagel, these variables could have a dual effect on inflation. On one hand, economic slowdowns resulting from new tariffs could dampen prices. On the other, supply chain disruptions might exert additional upward pressure on inflation.

---

---

Strategic Prudence and Room for Maneuver

The Bundesbank chief defended the current interest rate level as appropriate for maintaining strategic flexibility. He advised against immediate further easing and advocated for a cautious stance in both monetary policy and institutional communication.

Neutral, Not Restrictive, Monetary Policy

Nagel also stated that the ECB’s monetary policy is no longer acting as a brake on the economy, signaling a more neutral stance. This assessment supports the view that any further stimulus should be carefully calibrated.

Outlook: Brief Dips, No Lasting Deviations

While acknowledging that inflation may temporarily fall below 2% next year due to lower energy costs, Nagel maintained that a prolonged deviation is unlikely, citing persistent inflationary pressures in the services sector.

---