ECB official urges cautious approach on rates

FRANKFURT, Germany — Eurozone interest rate setters should proceed "gradually and cautiously" in loosening monetary policy as there are still challenges in tackling inflation despite recent progress, an ECB board member cautioned recently.

After the European Central Bank's historic campaign of interest rate hikes, eurozone inflation has been slowly coming down to the central bank's two-per cent target.

Data this week showed inflation dropping to 1.9 per cent in both Germany and France in August— the first time it has fallen below two per cent in both countries since 2021 — boosting expectations the ECB might cut rates again in September.

ECB board member Isabel Schnabel welcomed signs that consumer prices were cooling but cautioned that headline inflation "understates the challenges monetary policy is still facing".

In a speech in the Estonian capital Tallinn, she pointed in particular to "persistent price pressures in the services sector".

"Policy should proceed gradually and cautiously," she said.

"The pace of policy easing cannot be mechanical. It needs to rest on data and analysis."

The central bank for the 20 nations that use the euro currently expects inflation to fall back to the two-per cent target at the end of 2025, she said.

Surging energy prices after Russia's invasion of Ukraine sent eurozone inflation soaring past 10 per cent in late 2022, prompting the ECB to launch its tightening cycle.

The first cut after the hiking cycle came in June. The bank held off from a second cut in July but expectations are growing for a cut next month.

Full eurozone inflation figures for August are due later Friday.