European Central Bank (ECB) policymaker Bostjan Vasle urged the ECB to persist in cutting interest rates gradually. He emphasized there is no current need to consider pushing rates below neutral or overstimulating growth, despite recent discussions among ECB officials.
The ECB has reduced interest rates three times this year, and investors now speculate there’s a 40% chance of a 0.5% cut in December, double the previous cuts. Such speculation gained traction after some policymakers suggested the ECB may eventually lower rates enough to spur growth.
Vasle advised caution, stressing the need for a step-by-step approach due to uncertainties surrounding inflation. “We should proceed to neutral in measured steps,” Vasle said.
Inflation recently fell below the ECB's target level (2%), though a slight rise is expected at the end of 2024. Some policymakers believe the bank will return to its target by early 2025, with the risk of undershooting becoming a possibility.
Vasle highlighted persistent inflation in services and fast wage growth as challenges, even amid signs of moderation. A forthcoming rate cut, from the current 3.25%, will edge closer to the neutral rate—where the ECB neither restricts nor stimulates growth.
“By lowering interest rates further, we’ll reach the upper range of neutral estimates,” Vasle noted, hinting that the ECB might refine its guidance to maintain a restrictive stance. Economists generally place the neutral rate between 2% and 2.5%, with broader estimates ranging from 1.75% to 3%.
Vasle recognized economic growth remains weak and a long-anticipated recovery could be delayed.