The European Central Bank has room to cut its interest rates further if inflation eases to its 2% goal this year as it expects, ECB policymaker Joachim Nagel said on Tuesday, adding the outlook for prices was “encouraging”.
The ECB is widely expected to cut rates for a fifth straight time next week after seeing inflation fall from double digits after Russia’s 2022 invasion of Ukraine to just over 2% in recent months.
Nagel said incoming data, especially the latest developments on price growth, suggested the ECB was likely to achieve its target this year.
“This would allow us on the Governing Council to lower the key interest rates further,” he said in a speech as he presented the Bundesbank’s annual accounts.
“Overall…the outlook for prices is fairly encouraging,” he added, while cautioning about “persistently elevated core inflation and the undiminished strength of services inflation”. Meanwhile the Bundesbank, as the ECB’s main shareholder, was still paying a high price for its past largesse in the form of massive bond purchases, and the subsequent bout of high inflation.
The German central bank posted yet another loss in 2024 as meagre income from bonds it bought when rates were low was outweighed by large interest payments to banks. The €19.2 billion- ($20.10 billion) loss wiped out the Bundesbank’s reserves and was carried forward to this year.
The German central bank said it expects to record losses for some time to come, meaning it won’t be able to pay dividends to the German federal government.
But Nagel stressed the Bundesbank had a sound balance sheet, including revaluation reserves worth 267 billion euros. “The Bundesbank is fully unrestricted in its ability to act,” Nagel said.
