Nagel (ECB): Uncertainty Prevents Commitment on Interest Rates

The European Central Bank (ECB) should not commit to a specific interest rate path due to significant uncertainty surrounding global trade policies and the situation in the Middle East, according to ECB Governing Council member and Bundesbank President Joachim Nagel. “The biggest factor of uncertainty for the future direction of our monetary policy—aside from developments in the Middle East—is undoubtedly the unpredictable trade policy of the U.S.,” Nagel stated today (June 23, 2025). Speaking at the Walter Eucken Institute in Freiburg, Germany, Nagel emphasized that “not only is it unclear how strong the impacts could be, but ultimately it is even uncertain” whether President Donald Trump’s tariff push will be inflationary or deflationary. Therefore, Nagel argued, “it is wise if we—as members of the Governing Council—continue to remain flexible and data-dependent.” ECB President Christine Lagarde noted that the easing campaign is nearing its end after officials cut the deposit rate from 4% to 2% within a year. While some suggested the cycle might already be over, others indicated additional cuts may be needed to support growth. The ECB anticipates economic momentum in the coming years but acknowledges heightened uncertainty amid escalating conflicts in Ukraine and the Middle East. Nagel, traditionally seen as one of the most hawkish Governing Council members, stated that “we are currently in a good position regarding interest rates to wait for further inflation developments,” echoing Lagarde’s earlier remarks in a European Parliament hearing. Addressing concerns about whether the ongoing reduction of the ECB balance sheet conflicts with lowering borrowing costs, Nagel said he sees no issue. “The gradual phasing out of asset purchase programs should have only minor effects on monetary policy,” he explained, noting that the ECB already accounts for quantitative tightening impacts on medium- and long-term market rates. “The Eurosystem is currently effectively steering monetary policy stance through key interest rates,” Nagel concluded. “Thus, we can continue to phase out passive monetary policy programs without concern.”