- Upper end of neutral rate reached
- ECB should continue to act carefully in 2025
The European Central Bank (ECB) cut its key interest rates by 25 basis points today, as expected. This decision to cut rates means that the upper end of the neutral rate has now been reached. “That fits with the current rate of inflation, which is slightly above the ECB’s medium-term goal of two percent,” said Heiner Herkenhoff, CEO of the Association of German Banks. When key interest rates are between two and three percent, monetary policy is considered to be neutral – it neither curbs nor stimulates demand.
“Even though it may appear that the ECB has reached calmer waters, the inflationary trend in the coming year remains uncertain,” warned Herkenhoff. Certainly, the weakening economy and lower energy prices indicate a further decline in the rate of inflation. Nevertheless, continued above-average wage growth and a weaker euro could keep inflation above the ECB's target.
“And it remains to be seen how the future US government’s trade policies will affect prices,” said the head of the association representing Germany’s private banks. They could accelerate inflation in the euro area if there is a further devaluation of the euro or if any trade-policy countermeasures are taken by the Europeans.
Herkenhoff is therefore advising continued caution. “With interest rates in the neutral range, there is less pressure to reduce them further, as long as inflation stays above the ECB’s target rate.
