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The European Central Bank (ECB) is discussing whether to cut interest rates below neutral levels to stimulate the Eurozone's faltering economy, according to multiple anonymous sources. The debate highlights growing concerns among ECB policymakers about persistently low inflation and sluggish growth.
Policy Shift Under Consideration
While the ECB has been reducing rates this year to maintain a neutral policy—neither stimulating nor restricting growth—the conversation has shifted. Some policymakers now argue that deeper cuts may be required to avoid inflation undershooting the ECB’s target, a scenario reminiscent of the pre-pandemic years.
Economic Stagnation and Inflation Risks
The Eurozone’s economic outlook has deteriorated, with inflation well below earlier forecasts. This has sparked discussions among a small but growing group of ECB officials who believe the central bank is "behind the curve." They suggest that stronger rate cuts could prevent prolonged economic stagnation and help stabilize inflation.
Calls for Policy Reevaluation
Some policymakers advocate revisiting the ECB’s current "meeting-by-meeting" approach, calling for clearer guidance on potential rate cuts. Lithuanian central bank head Gediminas Simkus has publicly expressed concerns, warning that entrenched disinflation might require lowering rates below the neutral level.
Uncertain Neutral Rate
The concept of a neutral interest rate remains uncertain, with estimates ranging between 2% and 2.5%. ECB President Christine Lagarde acknowledged this uncertainty, stating, "If you were to ask me today, 'Where is it?', the honest answer is, 'I don't know.'"
