ECB's Nagel: June Rate Cut Not Necessarily Start of Easing Cycle

Joachim Nagel, a member of the European Central Bank's Governing Council, stated on Tuesday that while the ECB is widely expected to cut interest rates at its June meeting, this move may not be the beginning of a sustained series of rate cuts. Nagel expressed concerns about persistent inflation, particularly in the services sector, driven by strong wage growth.

"I am not fully convinced that inflation will return to the ECB's target in a timely and sustained manner," Nagel said in an interview. He emphasized that given the current economic uncertainty, the central bank cannot pre-commit to a particular rate path beyond the anticipated June cut.

Nagel's comments were among the most cautious from ECB policymakers, many of whom have suggested that further policy easing is likely even if they are not ready to commit to a specific timeline. The remarks also contrast with the broader dovish tone from other ECB officials, who have indicated a potential cut in the base lending rate next month.

Why this matters: Nagel's statements introduce complexity to the forecast for the Euro, as the currency's attractiveness to investors could be enhanced by the possibility of sustained or higher interest rates. This uncertainty surrounding the ECB's future actions has contributed to recent volatility in the EUR/USD exchange rate.

The higher-than-expected preliminary Eurozone Services PMI data for April has raised some doubts about the confidence that the ECB will proceed with rate cuts in June. Nagel suggested that the central bank will closely monitor first-quarter Eurozone wage growth data, which he considers a defining factor for their decision-making.

Nagel acknowledged that higher-than-expected inflation and interest rates in the United States would have some spillover effects on the ECB's models and decision-making. However, he also highlighted the differences between the demand-driven inflation in the U.S. and the supply-driven inflation in the Eurozone.

Despite advocating for a cautious approach to rate cuts, Nagel said he would "definitely" favor a rate cut at the ECB's Governing Council meeting on June 6, 2024, if wage inflation and other data support such a move. The EUR/USD pair is currently trading lower, easing below 1.0700 following Nagel's hawkish remarks.

Key Takeaways

• ECB's Nagel cautious on rate cuts, concerned about persistent inflation.
• Nagel says ECB can't pre-commit to rate path beyond anticipated June cut.
• Nagel's remarks contrast with dovish tone from other ECB officials.
• Higher Eurozone Services PMI raises doubts about ECB's June rate cut.
• Nagel says higher U.S. rates would impact ECB's decision-making.