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European Central bank policymakers are currently debating whether Interest rates should be lowered further in order to stimulate the economy, a shift from their previous focus on maintaining a neutral stance. Sources familiar with the discussions note that while a consensus has not yet been reached, some policymakers are advocating for deeper rate cuts to prevent Inflation from falling too low given the rapid deterioration of the economic outlook in the Eurozone.

The ongoing economic stagnation and persistently low Inflation levels have led some policymakers to argue that the ECB has fallen behind the curve and that more aggressive rate cuts may be necessary to jumpstart growth. This shift in the policy debate could result in the ECB revisiting its guidance on Interest rates and potentially considering going below the neutral level in order to support the economy.

The uncertainty surrounding the neutral rate has been a point of contention, with estimates varying widely among different sources. While the ECB has maintained a neutral stance in its rate cuts thus far, some policymakers believe that more decisive action is needed to address the current economic challenges facing the Eurozone.

The key argument for cutting rates below the neutral level is to counteract sluggish economic growth and prevent a further slowdown in Inflation. Without a significant rebound in growth, there is a risk that Inflation could undershoot the ECB’s target, leading to potential softening in the labor market and downward pressure on prices.

While some policymakers have expressed concerns about the risks of Inflation falling too low, no source has explicitly advocated for larger rate cuts beyond the current 25 basis point moves. The decision on whether to go below the neutral level is still months away, and the outlook may evolve as the economic situation continues to unfold.

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