Euro zone inflation on the decline but job not yet done, ECB’s Nagel says

FRANKFURT (Reuters) – Euro zone inflation is on the decline but the European Central Bank must remain vigilant and ensure that price growth settles at its 2% target even over the medium term, Bundesbank President Joachim Nagel said on Tuesday.

The ECB has cut interest rates twice this year and further easing in both October and December is nearly fully priced in, suggesting that investors see a steady decline in rates after they hit a record high.

“Fortunately, inflation expectations are now well anchored again,” Nagel said in a speech. “Even if inflation rates are likely to rise again somewhat in the coming months due to base effects, inflation is fundamentally on the decline.”

Several policymakers have already argued for or hinted at an Oct. 17 rate cut and only a few on the 26-member Governing Council have pushed back, indicating that a cut will be relatively uncontroversial and the real discussion is now about what to do in December.

Warning that the fight against inflation is not yet won, Nagel also warned that underlying price pressures are still too high with core inflation still well above 2%.

“Core inflation and in particular, developments in service prices are not yet satisfactory,” Nagel said. “We must therefore remain vigilant so that the inflation rate settles at 2% in the medium term.”