ECB Not Ready to Reduce Borrowing Costs, Says Bundesbank President

According to Yahoo News, Bundesbank President Joachim Nagel stated that the European Central Bank (ECB) is not yet in a position to consider reducing borrowing costs. He emphasized that it would be premature to lower interest rates soon or to speculate about such steps. Nagel also noted that the main effect of the policy tightening on inflation is yet to unfold. The ECB has likely concluded its rate-hiking campaign and will pause for a second consecutive time at its December meeting. While the market is already betting on rate cuts as soon as April, officials have said that another increase is still possible and that it’s too early to discuss cuts. Inflation has cooled dramatically from its 10.6% peak last year to 2.9% in October, yet policymakers have emphasized that the last mile down to the 2% target will take longer and base effects will indeed push up consumer-price growth in coming months. Nagel warned that the disinflationary effects of fallen energy prices have dissipated and the economy is still a considerable distance away from the target level. The struggling economy is now starting to feel the impact of monetary tightening, with output in the 20 currency-nation contracting in the third quarter and pessimistic business surveys making a recession look increasingly likely. However, Nagel expressed confidence in avoiding a 'hard landing,' citing the tight labor market, low corporate and household debt levels, and brisk investment activity as conditions for a 'soft landing.' ECB President Christine Lagarde told European lawmakers on Monday that officials may soon revisit their €1.7 trillion ($1.9 trillion) pandemic bond portfolio and reconsider how long they will replace maturing securities. Under current guidance, reinvestments under the so-called PEPP program are set to continue until the end of next year.