Joachim Nagel, a policymaker at the European Central Bank, said on Tuesday (February 26) that with the improvement in the inflation outlook, the European Central Bank is likely to continue its rate cuts this year. If inflation falls to the target level of 2% as expected, the European Central Bank will further reduce rates. In the annual report of the Bundesbank, he noted that the price outlook is "encouraging" and hinted that next week may mark the ECB's fifth consecutive rate cut.
Nagel stated that, based on the soon-to-be-released latest economic data, especially the performance of price growth, the ECB is likely to achieve its 2% inflation target. Recently, inflation had once soared into double digits following the outbreak of the Russia-Ukraine conflict in 2022, but in recent months, it has fallen back to just above 2%. This trend keeps the ECB optimistic.
However, Nagel also warned that the persistent rise in core inflation and service sector inflation may pose challenges to future rate cut policies. He added, "Although the overall price outlook is encouraging, the rise in core inflation is still a matter of concern."
Meanwhile, the Bundesbank, as the main shareholder of the ECB, continues to face economic pressure from high inflation. Due to large bond purchases during periods of low interest rates, the Bundesbank experienced another loss in 2024, amounting to 19.2 billion euros, which wiped out its reserve funds and is expected to continue facing record losses for some time. This means the Bundesbank will not be able to pay dividends to the federal government.
Nonetheless, Nagel emphasized that the Bundesbank's balance sheet remains robust, including 267 billion euros in revaluation reserves, and stated that "the operational capability of the Bundesbank is completely unrestricted."
In this context, the European Central Bank will continue to monitor changes in inflation data and adjust monetary policy as necessary to respond to economic conditions.
