ECB rate cut likely: 'No normal interest rate has been known for 15 years'

The European Central Bank has every reason to cut interest rates, says Han de Jong, an economist at the European Central Bank. The European economy is growing at a slow pace, and inflation has fallen to a sustainable level. “There are fewer and fewer reasons to keep interest rates as tight as they are now.”

Economists consulted by Bloomberg expect the European Central Bank to cut interest rates faster than previously thought. “They have a good point,” says de Jong. “We know that the current level of interest rates is very restrictive and that the European economy is growing slowly. Inflation has also fallen sharply.”

According to De Jong, these developments pave the way for a rate cut. “Inflation is still above target so it is good to cut it cautiously.” However, according to De Jong, the scenario poses a difficult problem: defining the neutral level of interest rates. “What is the neutral level of interest rates where growth is reasonable and inflation is under control?”

regular interest rate

“We haven’t had a normal interest rate in Europe for the past 15 years because of the financial crisis, the coronavirus pandemic and high inflation,” says de Jong. “So it’s very difficult to define what a normal level is.” According to de Jong, the idea of ​​implementing small interest rate cuts every six months allows policymakers to make gradual adjustments if necessary.

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