ECB’s Nagel: Should End Net Asset Purchases in June, Start Hiking Rates in July

11 May 2022

By David Barwick – FRANKFURT (Econostream) – Net asset purchases by the European Central Bank should end in June and be followed by a first rate hike in July, ECB Governing Council member Joachim Nagel reiterated on Wednesday.

In a speech at the DZ Bank Capital Markets Conference, Nagel, who heads the German Bundesbank, said that while ‘increasing calls for a quick end to the highly accommodative stance are understandable’, at the same time ‘it is important to proceed in a reliable, systematic manner especially in times of extraordinary uncertainty.’

The ECB will act according to data and step by step, he said.

Net asset purchases ‘could be wrapped up at the end of June’, he said. ‘In my view, that should be followed by a timely initial rate hike, which could be in July.’

In a speech yesterday, Nagel also urged such timing. Today, he spoke as well against raising borrowing costs before net purchases had ended, as that ‘would send a contradictory signal: Such a policy would increase short-term rates and at the same time push down medium- to long-term interest rates.’

‘It remains to be seen how many rate hikes there will be by the end of the year’, he continued. ‘In any case, the exit from the very accommodative monetary policy should be swift and smooth. Swift enough to affect the price path and to prevent second-round effects and a de-anchoring of inflation expectations. Yet at the same time smooth enough so that households, corporates and financial markets can cope with it.’

The economic impact of Russia’s war against Ukraine is ‘threatening to become more and more severe’, he warned. However, the recovery would probably not be derailed, he said.

On the inflation front, pressures are widening and more are in the pipeline, he said. Inflation rates would approach 7% this year in Germany, he said.

‘The longer the high inflation figures persist, the greater the risk of second-round effects becomes’, he said. ‘Monetary policy has to act before medium- to long-term inflation expectations show clear signs of de-anchoring. Acting too late would necessitate a stronger reaction to rein in inflation.’