ECB’s Nagel Sees Greater Risk of High Inflation Being Persistent, Calls for Policy to be on Guard

11 January 2022

By David Barwick – FRANKFURT (Econostream) – Monetary policy needs to be on guard amid mainly upside inflation risks, and the European Central Bank must do whatever is necessary to safeguard price stability, newly minted ECB Governing Council member Joachim Nagel said on Tuesday.

In a speech at a ceremony to mark the change in leadership at the German Bundesbank, which Nagel heads following the departure of Jens Weidmann, Nagel made clear that he had no plans to stray from the course of his predecessor in terms of monetary policy.

While a believer in ‘taking a close look at data and analyses, asking for different opinions and then forming one's own opinion’, Nagel said that ‘[i]n doing so, I will follow the Bundesbank's previous line: The Bundesbank drew attention to inflation risks at an early stage. It has also always insisted that the emergency purchase programme PEPP remain closely linked to the pandemic. And it has urged that the very expansionary course of monetary policy not be maintained for too long and that options for action be kept open. For despite all the uncertainty, one thing is quite clear: if price stability requires it, the ECB Governing Council must act and adjust its monetary policy course.’

The recent surge of inflation has left consumers with ‘considerably less money in their wallets’ and ‘[m]any people are concerned about this loss of purchasing power’, he said. The increase is not entirely due to transitory effects, he cautioned, and prospects remain very uncertain.

‘It is true that prices could also rise less than is estimated in the forecasts’, he said. ‘However, I currently see more of a risk that the inflation rate could remain elevated for longer than currently expected. In any case, monetary policy must be on its guard.’

The issues the current environment raises ‘are of great concern to all of us’, he said, and include the questions ‘is the very loose stance of monetary policy still appropriate? If so, for how much longer?’

‘[H]ow should we deal with the current high uncertainty in monetary policy decisions?’ he continued to ask rhetorically. ‘How, for instance, should different risk scenarios be weighed against each other?’

Trust is the most important asset of a central bank, Nagel said. ‘It is particularly important for confidence that monetary policy focuses on the goal of price stability’, he said. ‘Central banks should therefore maintain their independence and interpret their mandate narrowly.’

There was no contradiction between this and taking ‘a broad view of the challenges of our time’, he said. ‘On the contrary: a stability-oriented monetary policy includes, for example, paying more attention to climate aspects.’

‘However, the decisive course towards climate neutrality must be set by governments and parliaments’, he said. ‘They decide on the concrete policy measures, especially the pricing of greenhouse gas emissions, on international coordination and on social compensation.’

Like the energy transition, fairness towards future generations also means ensuring that the state has ‘sufficient fiscal leeway to be able to counteract future crises’, he said. ‘Therefore, public finances must be solidly positioned in good times. Solidity is the basis for stabilisation in bad times.’

‘Moreover, sound public finances are a very important protection for the common monetary policy’, he continued. ‘This is a fundamental conviction of the Bundesbank. Therefore, it is part of the job description of every Bundesbank president to sometimes give critical advice. It is elementary that monetary policy does not come under pressure to ensure the solvency of states. In the discussion on the reform of European fiscal rules, one thing above all is therefore crucial: high debt ratios must be reliably reduced.’