ECB should continue small rate cuts, Patsalides tells Reuters

Investing.com — The European Central Bank (ECB) should maintain a strategy of implementing small, gradual interest rate cuts, according to Cypriot policymaker Christodoulos Patsalides. He expressed his views on Thursday to Reuters, stating there is no current need for the ECB to ease its policy to a point where it stimulates economic growth.

The ECB has been easing its policy for the better part of this year. The ongoing debate is centered around the pace and extent of the rate cuts, as concerns over inflation have largely disappeared while economic growth remains slow.

Patsalides, a new member of the ECB’s Governing Council, expressed a preference for small adjustments in a gradual process rather than larger interest rate cuts. He cited the high level of uncertainty in both directions as a reason for the need for vigilance and caution. Patsalides also emphasized the importance of not surprising the markets or sending the wrong signals.

Last week, some policymakers, primarily from the southern nations of the 20-member currency bloc, advocated for a 50 basis point rate cut. However, Patsalides believes such a move would require a durable fall in inflation below the ECB’s 2% target, a scenario that is not currently expected.

Patsalides stated that interest rates would continue on a downward path, but he refrained from endorsing market predictions for four consecutive cuts in the first half of 2025. He justified his stance by pointing out that markets can sometimes be incorrect and reserved his right to change his opinion if the outlook shifted.

Patsalides also weighed in on the debate about whether the struggling economy needs a boost from its central bank. He said the ECB has no reason to lower interest rates to a level that begins to stimulate the economy. He added that going below the neutral rate would imply a recession or the projection of a severe recession, which is not what the ECB projections currently show.

The neutral rate, a concept that neither stimulates nor slows growth, is a loosely defined concept with a wide range of estimates. Patsalides used a wider estimate, stating it was between 1.5% and 3%. After the ECB cut its deposit rate to 3% last week, he suggested that it was approaching the neutral rate and might not necessarily have much distance to cover to reach it.

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