ECB moves closer to reaching its inflation target, Nagel says

The Star

7 hours ago

ECB governing council member Joachim Nagel. — Bloomberg
BRUSSELS: The European Central Bank (ECB) is close to hitting its 2% inflation goal, but elevated uncertainty makes it impossible to predict future interest rate moves and requires maximum flexibility, governing council member Joachim Nagel says.
The target is finally within reach,' the Bundesbank president said in Mannheim, Germany.
'We're on the right track, even if it remains rocky,' he said, referring to the recent uptick in underlying and services inflation.
Nagel said it's still premature to say whether officials will lower rates again at their next meeting in less than two weeks, highlighting the ECB's data-dependent and meeting-by-meeting approach.
'If we hadn't already practiced this flexibility for some time, we'd have to introduce it now because it would currently be impossible to reliably commit to a specific interest rate path,' he said.
The ECB is widely expected to lower borrowing costs on June 5 as inflation retreats and the economy faces tariff headwinds.
Some officials are open to bringing the deposit rate below 2% – the level most commonly cited as neither curbing nor supporting activity – while others urge caution, pointing to price pressures to come.
Investors ramped up easing bets last Friday after US President Donald Trump threatened to apply levies of 50% on the European Union starting June 1, pricing at least one more cut following the one next month.
They've kept that outlook even as Trump last Sunday extended the deadline for talks to July 9.
Nagel stressed Trump's policies as a driving force of uncertainty. While trade tensions will dampen growth in Germany and the eurozone, the effects on inflation are less clear, he said.
The bloc's economy surprised with growth of 0.3% in early 2025. But it's yet to feel the full force of the US levies.
Data last week showed private sector activity unexpectedly shrank in May as services recorded their worst performance in 16 months.
While price gains held at 2.2% in April due to stronger underlying pressures, analysts forecast a reversal in May, probably pushing inflation even below 2%. The European Commission expects it to even average 1.7% next year.
The ECB will present its own forecasts when it meets in June. Nagel cautioned that the trade uncertainty means they'll be 'based on less solid ground than usual'.
'As far as economic growth is concerned, at least the direction seems clear,' he said.
'Germany and the eurozone as a whole are likely to suffer noticeable losses as a result of US tariff policy.'
'Inflation could turn out higher or lower than recently expected, depending on how the trade dispute plays out and on other factors such as exchange rates, service prices and financial packages,' he said.
Whether the latter will boost price pressures will hinge on what the additional money is used for, how quickly it flows and what's imported from abroad.
'These imponderables make forecasts difficult,' Nagel said. But considering the recent high inflation period, it's all the more important to keep expectations for consumer price growth anchored.
Some gauges measuring the medium-term outlook of households and businesses have increased again recently, he said.
'Concerns about rising prices as a result of tariff policy don't only seem to be troubling Americans,' Nagel said. 'We'll keep a close eye on this development.' — Bloomberg