ECB's Nagel: Inflation Trends Are Positive, But Premature Rate Cut Chatter

This month, inflation in the Euro zone fell to 2.4%, significantly below expectations for the third consecutive month. This has fueled market wagers that the European Central Bank will reduce interest rates much more rapidly than it currently projects.

Investors anticipate a total of 115 basis point of movement in 2024, with the first reduction occurring in April, despite the argument of ECB President Christine Lagarde and other policymakers that several quarters of steady rates are sufficient to completely eradicate inflationary pressures.

"Inflation risks are favourable, in part because of the present geopolitical climate," Nagel stated in a Berlin address. "That's why I don't rule out a further interest rate hike."

"It is premature to contemplate a potential decrease in the key interest rates at this stage," Nagel, an influential member of the ECB's Governing Council responsible for establishing these rates, further stated.

Ten consecutive increases culminating in September brought the ECB's deposit rate to an all-time high of 4%. The ECB anticipates a gradual increase in inflation over the subsequent months, before reverting to its target level in the latter part of 2025.

Nagel expressed satisfaction with the recent deceleration in price growth and the reduction in short-term inflation expectations; however, longer-term inflation expectations remain significantly higher than 2%.

"Market players continue to hedge against the risk of excessive inflation in the long term," according to Nagel. "And the Middle East war has given new fuel to inflation risks."

Long-term inflation expectations as measured by the market have decreased from approximately 2.65% to 2.40%, but some policymakers contend that actual expectations are now close to 2%, excluding risk premia.