ECB to near inflation target by middle of year, Nagel says

The European Central Bank should be close to its 2 percent inflation goal by mid-2025, allowing it to lower interest rates to levels that no longer weigh on the economy, according to Governing Council member Joachim Nagel.

“We are on a good path to our target and it looks like that by the middle of this year we could be close to our target” the Bundesbank president told Bloomberg Television’s Francine Lacqua on Tuesday.

Asked whether it’s possible to reach the so-called neutral rate by then, he said: “I guess it is achievable.”

Speaking on the sidelines of the World Economic Forum in Davos, Nagel warned that the ECB’s task to quell inflation isn’t over. But even with service-price rises still looking “pretty sticky,” softer wage gains are likely to help tame them over the coming months.

The ECB is widely expected to cut its key deposit rate to 2.75 percent from 3 percent next week – after four quarter-point reductions in 2024. Despite an uptick toward year-end, inflation is seen settling at the 2 percent target this year, while the economy is struggling to grow.

Nagel said there’s a “certain probability” of a reduction on Jan. 30, but said cuts are “never a done deal.”

Officials have also signaled further moves after January to bring rates to a level that no longer restricts economic activity. But uncertainty remains elevated and policymakers have different views on where the so-called neutral setting is — ranging from slightly below 2 percent to about 3 percent.

Earlier Tuesday, France’s Francois Villeroy de Galhau told Bloomberg TV there’s a “plausible consensus” that the ECB will continue cutting at each meeting, reiterating that the deposit rate may reach 2 percent by the summer.

Those remarks echoed Villeroy’s Slovak counterpart, Peter Kazimir, who told Bloomberg a day earlier that he sees three or four reductions in borrowing costs this year.

Nagel expressed optimism in bringing inflation back to 2 percent, though wouldn’t speculate on the longer-term path for rates.

Recent data “gave me the indication and also the certainty that we can achieve our target, back to price stability,” he said. “We learned a lot during the last two and a half years. So this meeting-to-meeting approach worked pretty well and I guess it should be the way forward for the next six months.”

(Bloomberg)