Bundesbank President Joachim Nagel said euro-area interest rates are now sitting close to “neutral,” with the European Central Bank’s policy stance broadly appropriate as inflation projections stabilise.
Speaking on the ECB’s policy outlook (see part 5 specifically), Nagel stressed that decisions are made collectively by the 20-member Governing Council, soon to become 21 when Bulgaria joins in January, and not by the Bundesbank alone.
He noted that euro-area borrowing costs have swung dramatically in recent years, moving from deeply negative levels to ten consecutive rate hikes totalling 450 basis points between mid-2022 and late-2023, as policymakers fought the post-pandemic inflation surge. The ECB then pivoted, cutting rates by 200bps between June 2024 and mid-2025, before holding steady at recent meetings.
With ample liquidity still in the system, the deposit facility rate, now the ECB’s key policy lever, stands at 2%. Nagel said model estimates put the nominal natural rate somewhere between 1.7% and 2.6%, placing the current stance “more or less in the middle” and suggesting policy is neither stimulative nor restrictive. But he cautioned that natural-rate calculations are uncertain, and that inflation projections remain the more reliable compass.
ECB staff forecasts from September show inflation averaging close to 2% over the next three years, with a temporary dip in 2026, while growth is expected to hover around 1.2%, broadly in line with the European Commission’s estimate of potential output. Nagel said the consistency of recent projections reinforces the view that rates are “in a good place.”
The ECB will publish updated projections, including its first look at 2028, at the December policy meeting. Nagel said those forecasts will determine whether the Governing Council remains on track to deliver its medium-term inflation target.
This article was written by Eamonn Sheridan at investinglive.com.