The European Central Bank isn’t yet at a point where it should consider reducing borrowing costs, according to Bundesbank President Joachim Nagel.

“It would be premature to lower interest rates soon or to speculate about such steps,” the German central banker said Tuesday in Nicosia. “It is not just the level of interest rates that matters for the stance, but also expectations about the future path of interest rates. The main effect of the policy tightening on inflation is yet to unfold.”

The ECB has likely concluded its rate-hiking campaign and will pause for a second consecutive time at its December meeting. While the market is already betting on rate cuts as soon as April, officials have said that another increase is still possible and that it’s too early to discuss cuts.

That idea was backed by Bank of Spain Governor Pablo Hernandez de Cos, who spoke earlier in the day in Hong Kong.

Inflation has cooled dramatically from its 10.6% peak last year to 2.9% in October, yet policymakers have emphasized that the last mile down to the 2% target will take longer and base effects will indeed push up consumer-price growth in coming months.

“While headline inflation has fallen significantly over the last months, we cannot take it for granted that this decline will continue,” Nagel said. “The disinflationary effects of fallen energy prices have dissipated and we are still a considerable distance away from our target level. And we expect a bumpy road ahead, with ups and downs in inflation over the near future.”

Meanwhile, the already struggling economy is now starting to feel the effect of monetary tightening. While the full impact is yet to unfold, the first cracks are already showing: Output in the 20 currency-nation contracted in the third quarter, and pessimistic business surveys make a recession look increasingly likely. Economists see the euro zone narrowly escaping such a fate by stagnating in the current quarter.

While the euro zone is currently experiencing a period of “pronounced weakness,” Nagel said he’s confident of avoiding a ‘hard landing.’ “The tight labor market, low corporate and household debt levels and brisk investment activity suggest that the conditions for a ‘soft landing’ are in place,” he said.

Nagel urged fiscal and monetary policies to work together, calling on governments to rein in spending as measures to combat recent crises become less necessary.

ECB President Christine Lagarde told European lawmakers on Monday that officials may soon revisit their €1.7 trillion ($1.9 trillion) pandemic bond portfolio and reconsider how long they will replace maturing securities.

Under current guidance, reinvestments under the so-called PEPP program are set to continue until the end of next year. Crucially, they can be deployed flexibly across jurisdictions to counter any fragmentation on the euro area’s bond market, which is why even some hawkish officials are hesitant to let go of the tool.

“It is clear to me that the large balance sheet will have to shrink further significantly,” Nagel said.

--With assistance from Sotiris Nikas and Jill Disis.

(Updates with De Cos, more from Nagel starting in fourth paragraph.)