In view of the falling inflation, the European Central Bank has lowered interest rates. What happens next is unclear, stresses the Bundesbank. It also supports a reform of the debt brake.
Bundesbank President Joachim Nagel does not expect any rapid interest rate cuts in the eurozone. In his opinion, it is certain that “key interest rates will not fall as quickly or as sharply as they have risen,” Nagel said, according to the text of his speech at a Commerzbank event in Frankfurt. It is unclear exactly what will happen next. Because the European Central Bank’s (ECB) future interest rate decisions depend on the development of economic data, “the time intervals between potential steps can vary.” Nagel also made it clear that the monetary policy course must remain “sufficiently tight” so that the inflation rate in the eurozone returns to the ECB’s target of two percent in the medium term.
“Inflation is not yet where we want it to be”
In the fight against high inflation with annual rates of more than ten percent in autumn 2022, the ECB had raised key interest rates ten times in a row. After inflation had eased, the ECB began to turn around interest rates in June. In September, the central bank cut the most important key interest rate, the deposit rate, again by 0.25 percentage points to 3.5 percent. Some observers expect the ECB to take a break at its next meeting in October.
Inflation in the eurozone was last at 2.2 percent in August. In his speech, Nagel referred to “wage pressure that is only slowly easing.” In addition, the decline in inflation is mainly based on a fall in energy prices. “Currently, inflation is not yet where we in the ECB Council want it to be,” said Nagel.
Nagel calls for moderate easing of the debt brake
The Bundesbank also once again called for a reform of the debt brake. Nagel pointed out that the debt ratio in Germany is no longer far from the 60 percent upper limit measured against gross domestic product, which is provided for in the European Maastricht treaties. “Here it can indeed make sense to increase the fiscal leeway somewhat through a moderate reform of the debt brake, as long as Germany complies with the European debt rules,” said Nagel. He referred to additional spending on climate protection and defense, for example, which moved up the priority list. By 2023, Germany’s debt ratio had fallen to 63.7 percent.
The debt brake anchored in the Basic Law only allows the federal government to take on new debt to a limited extent. In the traffic light government, there are repeated disputes about the debt brake in the course of the budget dispute. The FDP insists on compliance.
Source: Stern
