Better to wait and see: Bundesbank chief warns: Early interest rate cuts by the ECB will be fatal

German Central Bank President Joachim Nagel warned against cutting interest rates too quickly in the euro zone. “In previous interest rate cycles, waiting was always a better approach than reacting too early. It would be fatal if we cut interest rates too early,” the German said on Wednesday in an interview with Reuters news agency on the sidelines of the G20 meeting in Sao Paulo, Brazil. Then inflation returned again.”

Credibility question

He also said: “This is also an issue of credibility.” Otherwise there will be a risk of greater volatility in the financial markets. According to Nagel, the ECB is on the right track: “I am confident that the inflation issue will be resolved by 2025.”

President of the German Central Bank, Joachim Nagel

© Imago / Hannelore Forster

Up to two percent

By then, it will be possible to achieve the 2% inflation target again. This mark is considered optimal for the economy, but has been significantly exceeded recently. “The question now is when a potential interest rate cut might follow.”

Euro governors will discuss the key interest rate again in Frankfurt on March 7. New forecasts for economic development and inflation are then expected. Nagel said more data is needed before an interest rate cut. He added: “In my opinion, the road has not been completely secured yet. There is still a lack of more reliable data on wage developments and confirmation that with the new data we will reach 2% inflation in 2025. Next week's forecast is an important milestone.

“Can't make mistakes”

The European Central Bank has raised interest rates ten times in a row to combat high inflation. This had an impact, Nagel said. We have already achieved a lot with this. “We can't make any mistakes in the last part of the journey.”

In January, the euro zone inflation rate remained at 2.8 percent. In the fall of 2022, the percentage exceeded ten percent at times. The ECB currently remains concerned about relatively high wage agreements.