The European Central Bank may cut interest rates again this Thursday (March 6), but there is a concern internally that further easing policies may inadvertently lead the bank into stimulus territory as inflation has not been completely eliminated. This concern reflects the difficult choices faced by the central bank in the current complex economic and political environment.

1. The game between interest rate cuts and inflation

Almost no one doubts that the European Central Bank will cut interest rates again this week, but this decision is not without controversy. Some people within the central bank are concerned that further easing may shift policy from "restrictive" to "stimulative" before inflation is completely eliminated. This concern makes central bank officials walk on thin ice when formulating policies.

2. Uncertain economic and political background

The European Central Bank is about to review its policies again and release long-term forecasts, but like other major central banks around the world, it knows nothing about the future economic and political context. The uncertainty of potential tariffs in the United States, the formation of a new German government, the fate of Ukraine, and the potential increase in public spending from Europe's rearmament have all cast a thick fog over the central bank's decisions.

3. Severe fluctuations in macroeconomic indicators

Since the beginning of this year, several key macroeconomic indicators used to assess the inflation outlook of the European Central Bank have shown significant fluctuations. Taking European natural gas prices as an example, they surged by about 30% in mid January, but completely gave up the increase by mid last month. This fluctuation makes the central bank's predictions more difficult, and may even be based on outdated data.

4. Ambiguity of neutral interest rate and policy guidance

In the macro fog, the European Central Bank has begun to rely on the controversial concept of "neutral interest rates" to guide policy. The neutral interest rate (R *) is the interest rate at which the economy is in full employment and stable inflation, but its calculation depends on model assumptions and is difficult to determine in real time. Nevertheless, this concept provides policy makers with a theoretical framework to help them determine whether current policies are restrictive or stimulative.

5. The difference between hawks and doves

European Central Bank members generally believe that the current interest rate is higher than the neutral rate and still has a "restrictive" nature, which is also the reason why there may be a rate cut this week. However, hawkish figures such as Schnabel strongly advocate for a more cautious attitude from April onwards, pointing out that neutral interest rates are elusive and overly loose policies may inadvertently enter the stimulus zone.

6. The relationship between public debt and neutral interest rates

Schnabel pointed out that the rise in public debt is an important factor in the debate on neutral interest rates. If this argument holds, the European Central Bank may need to be very cautious after cutting interest rates, especially against the backdrop of Europe's rearmament potentially leading to further increases in public debt.

summarize

The European Central Bank is facing a complex policy environment, with balancing interest rate cuts and inflation becoming a key challenge. In an uncertain economic and political context, central banks rely on vague concepts of neutral interest rates to guide policies, but the divergence between hawks and doves makes decision-making even more difficult. In the future, the European Central Bank needs to find a delicate balance between avoiding excessive easing and addressing economic weakness, while being wary of the potential long-term impact of rising public debt.

In the short term, the expectation of interest rate cuts by the European Central Bank may put pressure on the euro, leading to its weakening. In the medium term, weak inflation and poor economic data may further weaken the euro. In the long run, policy differences with the Federal Reserve and geopolitical risks may put sustained downward pressure on the euro. Investors need to closely monitor the policy movements of the European Central Bank, economic data, and changes in global market risk sentiment.