inflation trends encouraging but rate cut talk too early By Reuters

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© Reuters. Joachim Nagel, President of the Deutsche Bundesbank speaks at an event in Central Bank of Cyprus in Nicosia, Cyprus November 28, 2023. REUTERS/Yiannis Kourtoglou

FRANKFURT (Reuters) – Euro zone inflation is going in the right direction but risks are skewed towards more negative outcomes, so a further rate hike cannot be taken off the table and cuts should not even be discussed, Bundesbank President Joachim Nagel said on Thursday.

Euro zone inflation tumbled to 2.4% this month, coming well below expectations for the third straight month, fuelling market bets that European Central Bank interest rates will come down much quicker than the bank now guides.

Investors see the first cut in April and a total of 115 basis points of moves in 2024, even as ECB President Christine Lagarde and several other policymakers are making the case for several quarters of steady rates to fully extinguish inflationary pressures.

“Inflation risks are on the upside, not least due to the current geopolitical situation,” Nagel said in a speech in Berlin. “That’s why I don’t rule out a further interest rate hike.”

“It seems to me far too early to even think about a possible reduction in the key interest rates,” Nagel, a powerful voice on the ECB’s rate-setting Governing Council, added.

The ECB raised its deposit rate to a record high 4% via ten straight moves ending in September and sees inflation inching up in the coming months before coming back to its target in the second half of 2025.

Nagel said the recent fall in price growth was welcome news and short term expectations have also retreated, but longer-term inflation expectations are still well above 2%.

“Market players continue to hedge against the risk of excessive inflation in the long term,” Nagel said. “And the Middle East war has given new fuel to inflation risks.”

Market-based expectations for longer-term inflation have dropped from around 2.65% to 2.40% but some policymakers argue that, excluding risk premia, actual expectations are close to 2% now.

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