ECB Should Continue with Small Interest Rate Cuts, Patsalides Tells Reuters
Investing.com -- Cypriot policymaker Christodoulos Patsalides believes that the European Central Bank (ECB) should maintain its strategy of implementing small and gradual interest rate reductions. In comments to Reuters on Thursday, Patsalides noted that the ECB does not currently need to ease its policy to the point of stimulating economic growth.
The ECB has been easing its policy for much of this year. Ongoing discussions have focused on the speed and scope of interest rate cuts, while inflation concerns have largely dissipated; however, economic growth remains sluggish.
As a new member of the ECB's Governing Council, Patsalides expressed a preference for small adjustments in a gradual process rather than larger rate cuts. He pointed to the high level of uncertainty in both directions as a reason to remain vigilant and cautious. Patsalides also emphasized the importance of not surprising the markets or sending incorrect signals.
Last week, some policymakers from southern countries within the predominantly 20-member currency bloc advocated for a 50 basis point interest rate cut. However, Patsalides stated that such a move would require a sustained drop in inflation below the ECB's 2% target, which is not currently anticipated.
Patsalides indicated that interest rates would continue on a downward path but refrained from endorsing market forecasts that predict four consecutive cuts in the first half of 2025. He justified his stance by noting that markets can sometimes be wrong and reserved the right to change his opinion if the outlook shifts.
Patsalides also addressed the discussion regarding whether the struggling economy needs support from the central bank. He stated that the ECB has no reason to lower rates to a level that would begin stimulating the economy. He added that falling below the neutral rate would imply a projection of recession or severe recession, which is not reflected in current ECB projections.
The neutral rate, a concept that neither promotes nor slows growth, has a wide range of estimates and is loosely defined. Using a broader estimate, Patsalides indicated that it lies between 1.5% and 3%. He suggested that after the ECB lowered the deposit rate to 3% last week, the neutral rate may be closer and that there might not be much distance left to reach it.