ECB reportedly begins discussing rate cuts below neutral level

Sources indicate the European Central Bank is considering a more aggressive monetary policy strategy to combat inflation

The move comes as the eurozone faces a deepening energy crisis and slowing economic growth

The European Central Bank (ECB) is reportedly considering cutting interest rates below the neutral level in an effort to combat inflation and support economic growth. According to sources familiar with the matter, the ECB's Governing Council began discussing the possibility of such a move at its meeting in September 2022. The neutral level is the rate at which monetary policy is neither expansionary nor contractionary. The ECB has previously indicated that it believes the neutral rate is around 1.5%. Cutting rates below this level would be a significant departure from the ECB's current policy stance.

The ECB's decision to consider cutting rates below the neutral level is a reflection of the growing economic challenges facing the eurozone. The region is currently facing a deepening energy crisis, with Russia cutting off gas supplies to several European countries. This has led to a sharp increase in energy prices, which is putting a strain on businesses and households alike. The energy crisis is also expected to lead to a slowdown in economic growth, as businesses scale back production and consumers reduce spending.

In addition to the energy crisis, the eurozone is also facing a number of other headwinds, including the ongoing war in Ukraine and the global supply chain crisis. These factors are all contributing to inflationary pressures, with the ECB's latest forecasts predicting that inflation will remain above its 2% target for the foreseeable future. The ECB's Governing Council is expected to discuss the possibility of cutting rates below the neutral level at its next meeting in October 2022. It is not clear whether the Governing Council will decide to take such a step, but the fact that it is being discussed is a sign of the growing concern about the economic outlook.

If the ECB does decide to cut rates below the neutral level, it would be a significant move that would likely have a number of implications. Lower interest rates would make it cheaper for businesses to borrow money and invest, which could help to boost economic growth. However, lower interest rates could also lead to higher inflation, as businesses and consumers may be more likely to spend money when borrowing costs are low. The ECB will need to carefully weigh the risks and benefits of cutting rates below the neutral level before making a decision.