Bundesbank’s Nagel says ECB rates are near neutral as inflation outlook steadies
Euro-area rates are “more or less” at neutral, Bundesbank President Joachim Nagel said, signaling the European Central Bank is likely comfortable holding steady into year-end while it assesses fresh forecasts that now stretch to 2028—key context for FX traders gauging the euro’s next move.
Policy stance: close to neutral, data still in the driver’s seat
Nagel said the ECB’s deposit facility rate at 2% now sits roughly in the middle of model estimates for the nominal natural rate—between 1.7% and 2.6%—suggesting policy is neither stimulating nor restraining the economy. He stressed that such estimates carry wide uncertainty and that inflation projections remain the better guide for decisions.
Euro-area inflation is projected to average close to 2% over the next three years, with a temporary dip in 2026, while growth is seen near 1.2%, broadly aligned with the European Commission’s view of potential output. Nagel said the consistency of recent projections supports the view that rates are “in a good place.”
From historic tightening to calibrated easing
The ECB has traversed an unusual policy arc: from deeply negative rates to 450 basis points of hikes across 10 consecutive moves between mid-2022 and late-2023, followed by 200 basis points of cuts between June 2024 and mid-2025. Policymakers have since paused, keeping the deposit rate at 2% as they monitor disinflation and growth resilience.
With ample liquidity still in the system, the deposit rate remains the ECB’s primary policy lever—anchoring front-end funding costs and shaping money-market dynamics across the bloc.
What it means for markets
For FX and rates traders, a near-neutral stance implies a higher bar for additional cuts unless inflation undershoots the target path. That typically:
– Keeps front-end euro rates relatively range-bound.
– Limits directional impulse for EUR crosses absent surprises in inflation or growth.
– Focuses attention on term premia and curve shape, especially if the medium-term inflation path is nudged closer to—or below—2%.
Volatility in euro rates and FX could pick up around the December meeting, when the ECB updates staff forecasts and unveils its first look at 2028, sharpening the view on the medium‑term real policy rate.
Governing Council dynamics
Nagel underscored that policy is set collectively by the 20-member Governing Council, which will expand to 21 when Bulgaria joins in January. That shift may subtly influence internal balance, but strategy remains anchored to the inflation mandate.
Key points
- Nagel: ECB policy “more or less” at neutral; deposit rate at 2% sits within the estimated 1.7%–2.6% nominal natural range.
- Inflation projections hover near 2% over the next three years; growth seen around 1.2%.
- After 450 bps of hikes (2022–2023), the ECB cut 200 bps (mid‑2024 to mid‑2025) and is now on hold.
- Ample liquidity leaves the deposit rate as the key operational tool guiding money markets.
- December meeting will include updated staff forecasts with the first read on 2028—pivotal for rate‑path expectations and EUR sentiment.
- Decisions remain collective as the Governing Council expands with Bulgaria in January.
December meeting in focus
The ECB’s updated projections will show whether policymakers still see inflation converging to target without further policy adjustment. Any downward drift in the medium-term inflation profile—or a weaker growth impulse—would embolden doves arguing for additional support in 2026. Conversely, signs that price pressures are sticky could push markets to pare easing expectations and support the euro via higher real yields.
FAQ
What does “neutral” interest rate mean for the euro?
A neutral rate is consistent with stable inflation and output—neither stimulating nor restraining growth. For EUR/USD, it often implies range-bound trading unless data shift inflation or growth materially away from projections.
Why do the ECB’s new forecasts matter for traders?
They guide the expected path of policy. A softer inflation trajectory or weaker growth could revive rate-cut bets, weighing on the euro and front-end yields. Stickier inflation or firmer activity would likely do the opposite.
How are money markets positioned?
With the deposit rate at 2% and liquidity still ample, front-end benchmarks remain anchored. Traders are focused on how the ECB’s 2028 projections inform the medium-term real policy rate and the timing of any further moves.
What could spark FX volatility around the meeting?
Surprises in the inflation path, changes to growth potential, or any signal that the neutral rate is higher or lower than assumed. Clear hawkish or dovish tilts in the press conference could also jolt EUR crosses.
What role does the Governing Council expansion play?
While each member has one vote, adding Bulgaria to the euro area takes the Council to 21. The broader composition can influence debate, but the mandate—and the reliance on forecast consistency—remains the anchor, as noted by Nagel.
This article was prepared by BPayNews.
