Officials at the European Central Bank (ECB) are considering lowering interest rates below the neutral level as the risk of inflation falling below 2% is increasing.

On Wednesday, October 23rd, Reuters reported, citing informed sources, that ECB officials have begun discussing whether to cut interest rates to a level that would stimulate economic activity. Although no consensus has been reached, a small group of officials believe that the ECB has fallen behind in easing monetary policy and therefore requires a more significant rate cut to prevent inflation from falling below the target level of 2%.

The report also stated that officials hope the ECB will remove the word "restrictive" from the phrase "restrictive interest rates" in its policy statement during subsequent rate decisions, indicating that the ECB is very concerned about the economic downturn risks.

On Tuesday, the central bank governors of France, Portugal, and Finland issued a joint warning that due to economic weakness, prices in the eurozone could be excessively dragged down, and the ECB is still restricting the economy with relatively high interest rates, making it possible for eurozone inflation to fall below the ECB's 2% target. This joint warning marks a shift in the focus of ECB officials from concerns about too rapid price growth to economic development stagnation.

In September, eurozone inflation fell to 1.7%, ending the situation of too rapid price increases over the past three years.

Currently, the market is betting that the ECB will quickly cut interest rates and will cut rates at every meeting before next spring to support the weak economy. Swap market prices show that there is a 45% chance that the ECB will cut rates by 50 basis points in December.

European short-term bonds are recovering some of their recent losses, with the yield on two-year German government bonds falling by 6 basis points to 2.12%, essentially erasing the gains after Monday's sharp sell-off.

French central bank governor Francois Villeroy de Galhau said in a speech at New York University:

"There is a risk of inflation falling below the target, especially in the case of weak growth. Unless the ECB maintains a flexible and pragmatic attitude, it may fall behind the situation in terms of interest rate cuts."

Portuguese central bank governor Mario Centeno agreed, warning for a long time that the ECB should not maintain high interest rates for too long. Finnish central bank governor Olli Rehn also pointed out that the current growth prospects are very weak, and the ECB must consider the downward risks of inflation. At an event at the Peterson Institute for International Economics in Washington, Rehn said:"Over the past few months, the growth outlook has significantly weakened, which could increase deflationary pressures."

However, European Central Bank President Christine Lagarde has taken a more cautious stance, stating at a Bloomberg news event that inflation will return to the 2% target next year, "hoping" that this will happen faster than the European Central Bank's projection, which anticipates inflation will return to 2% by the end of 2025.