The ECB's current interest rate is 3.75%. Policymakers believe that once interest rates fall to around 3%, it will be more difficult to control inflation.

On September 3, Bloomberg analyst Mark Schroers and others pointed out that ECB policymakers dispute the extent to which monetary policy relaxation will no longer be able to curb inflation; their estimates range from 2% to 3%. Executive Board member Isabel Schnabel said on Friday:

“The closer interest rates are to the upper limit of neutral interest rates, that is, the more uncertain we are about the restrictive effects of the policy, the more cautious we should be to avoid the policy itself becoming an obstacle to curbing inflation.”

Currently, however, ECB policymakers generally agree that there is room for further interest rate cuts, as consumer price increases are in line with their expectations, and they aim for inflation to return to 2% later next year.

After cutting interest rates in June, the market expects the ECB to continue to cut interest rates in September and December, and investors have not ruled out the possibility of cutting interest rates again in October. As inflation falls rapidly in Europe, analysts believe interest rates will eventually stabilize at around 2.5% by the end of the year.

However, the 26-member Decision Committee disagreed on whether inflation (2.2% in August) still poses a threat. Doves worry that current interest rates have not met the goal of boosting the economy, especially when economic momentum in the Eurozone's 20 countries is weak, while hawks worry that easing monetary policy too quickly will reignite prices.

Dovish officials are worried that Europe will return to low inflation and low growth before the pandemic. Greek official Yannis Stournaras called for “keeping an eye on exceeding and falling short of the inflation target”; Portuguese official Mario Centeno said the ECB must reduce inflation “with minimal sacrifices.”

Hawkish officials, on the other hand, emphasized that interest rates should not be cut quickly. Croatian official Boris Vujcic emphasized that price growth in the service sector is still stubborn, rising to 4.2% in August; German Bundesbank Governor Joachim Nagel proposed that the ECB should not cut interest rates too fast because “enhanced economic recovery may further delay inflation back to target values.”

However, there is more controversy about how much the neutral interest rate is, because the so-called neutral interest rate cannot be observed, and there are various estimates.

In a January article, ECB economists said that the real interest rate calculated by the model is -0.75%-1%, which means that the nominal interest rate is 1.25%-3%. However, French economist Francois Villeroy de Galhau said in April that according to estimates from the European Central Bank and the Bank of France, the appropriate nominal interest rate is 2%-2.5%. He said:

“This is not necessarily the goal of cutting interest rates now; it just shows that we have quite a bit of room to cut interest rates before withdrawing from the austerity monetary policy.”

These seemingly dovish neutral interest rate assessments are based on fundamentals where the Eurozone economy is still weak, such as low birth rates and declining productivity. Many hawkish officials disagree with this data; they tend to think that a nominal interest rate of 2.5%-3% is appropriate because Europe's green transition is costly and the labor market continues to be tight. Carsten Brzeski, head of macroeconomics at ING, said:

“The risk of continued stagflation in the Eurozone will make the dispute over interest rate cuts more intense after the ECB, as dovish and hawks in the decision-making committee are increasingly divided, and economic growth in the Eurozone needs to be further weakened before hawks agree to a series of interest rate cuts.”