ECB’s Nagel: Rates Lift-Off Could Occur This Year if Asset Purchases End as Foreseen

21 March 2022

By David Barwick – FRANKFURT (Econostream) – Key interest rates of the European Central Bank could be hiked this year if asset purchases end as currently foreseen, ECB Governing Council member Joachim Nagel said on Monday.

In a speech at a ceremony to mark the change in leadership at a regional branch of the German Bundesbank, which he heads, Nagel spoke in favour of being data-dependent, but against too much patience, given the increased risk of acting too late.

Monetary policymakers ‘would do well to emphasise this data dependence’, which is not in contradiction to the modified forward guidance on interest rates, he said. An increase in official borrowing costs would be gradual and respect the established sequence, he said.

‘If the net purchases end in the third quarter, as currently planned, this opens up the possibility of raising key interest rates this year if necessary’, he said.

Recent concerns about the potential for premature policy tightening to short-circuit the recovery had ‘argued for patience and a wait-and-see approach’, he said. ‘In the meantime, the risk of acting too late has become greater in my view.’

The admittedly especially high uncertainty ‘should not delay the exit from the very loose monetary policy’, he said. ‘Otherwise, interest rates might have to rise all the faster or higher later on’, with an abruptness that could cause problems.

Russian military aggression against Ukraine is ‘darkening the economic outlook’, he said, highlighting energy price increases, supply disruptions and additional uncertainty. All these areas could see further deterioration, so that ‘there are currently clear downside risks to the economy’, he said.

The 5.1% HICP forecast for the euro area this year could be valid for Germany as well, he said, calling for fiscal policy to mitigate the impact of high prices were needed.

‘However, we in the Governing Council must be determined to ensure that the strong upward pressure on prices does not become entrenched and lead to excessive inflation in the medium term’, he said. ‘Here, possible second-round effects are a key risk.’

Historically low unemployment and a dearth of qualified workers could put upward pressure on wages, he said.

‘However, second-round effects can also arise from the fact that the current wave of inflation is raising inflation expectations’, he said. ‘And the longer the high inflation lasts, the stronger it will be.’

Surveys conducted by the Bundesbank reveal households and firms to have been ‘adjusting their inflation expectations for the next twelve months significantly upwards’, he said. Experts also realise that the pre-pandemic lowflation days are over for now, he said.

‘In my view, we need to be very wary of upside risks to price stability in the medium term’, he said. Although the ECB forecasts call for inflation to retreat to around 2% after this year, ‘the uncertainty in the price outlook is extremely high’ and is now higher due to Russian aggression.

‘If the newly available data support the expectation that the medium-term inflation outlook will not deteriorate even after the end of net purchases, the Governing Council will discontinue these net purchases in the third quarter’, he said. ‘For me, it is very clear: if the price outlook requires it, we will have to normalise monetary policy further and also start to raise our key interest rates.’