Isabel Schnabel, a member of the European Central Bank's Executive Board, stated in a speech in Paris on Monday that as the inflation outlook stabilizes, the European Central Bank can continue to lower borrowing costs. However, this must be done in a "gradual" manner to avoid risks associated with a rapid rate cut. She emphasized that current interest rates are nearing the neutral level, which neither restricts nor stimulates economic growth.
Schnabel noted that although there have been four rate cuts in 2024, the European Central Bank should continue with a "gradual" reduction of 25 basis points rather than taking more drastic measures, to maintain policy stability. Additionally, Schnabel warned that a key part of the inflation slowdown has not yet been fully achieved, particularly as service prices remain high, posing an upward risk to inflation.
Currently, the European Central Bank's deposit rate stands at 3%, with market predictions that it will gradually decrease to 2% or even 1.75% in the future. However, Schnabel emphasized that the policy path should be adjusted according to changes in inflation and economic performance, as overly rapid or excessive easing could affect expectations for price stability.
Meanwhile, European Central Bank President Lagarde stated on the same day that with inflation surges gradually easing, the bank is confident in continuing to lower borrowing costs, making its inflation target "within reach." Belgian Central Bank Governor Pierre Wunsch also mentioned in an interview that investors' expectations for rate cuts largely align with policymakers' views, and inflation risks are relatively balanced at present.
However, the recovery of the eurozone economy remains fragile. According to the latest Purchasing Managers' Index (PMI) released by S&P Global, despite the service sector performing slightly better than expected, overall private sector activity is still contracting. Schnabel expects that as real income rises and financing conditions improve, consumption and investment will gradually recover next year, with economic growth likely to accelerate.
Regarding future policy directions, Schnabel pointed out that as prices stabilize, the challenges of monetary policy will change. She stated that the central bank can tolerate a short-term deviation of inflation from its target to some extent but must ensure price stability in the medium term and respond robustly to factors that could disrupt inflation expectations.
She concluded by emphasizing that monetary policy cannot solve the structural problems of the eurozone, and policymakers must carefully balance between inflation and economic growth.
