Mignolet, 31, is keen to secure regular first-team football and would be an attractive prospect for most Premier League sides.
Nicol expects the Belgian to leave Anfield soon and believes Cardiff’s Etheridge would make the ideal deputy for Alisson Becker.
“I think this would be a good signing,” Nicol said of Etheridge.
“I think the 69 goals he [Etheridge] let in, he probably had no chance with 55 of them, let’s be honest.
“Mignolet has to go, he has to go and play. You need a back-up who is going to be happy to be there but who is of a certain level that whenever something may happen to Alisson, you’re going to put Etheridge in and he’s going to do a great job.
“He’s going to be professional. He’s not going to be pulling off spectacular saves but you know what you’re getting. He’s decent with his feet, he does all the basics right.
“I think this is a good signing. He’s 29 years old, he’s been around, he knows what it’s like to be playing at the lower level so his feet will be firmly on the ground.
“He’ll look at this as, ‘This solidifies my family’s future. If I come to Liverpool for five years, be professional, when I’m called upon do a professional job…’
“I think this is a great move for him and I think this is a good move for Liverpool as well. You know what you’re getting. You’re not panicking whenever something happens to your No. 1.”