ECB’s Nagel: Risen Inflation Expectations ‘Worrisome’; ‘Must Not Respond with Too Little, Too Late’

23 June 2022

By David Barwick – FRANKFURT (Econostream) – Increased inflation expectations are cause for concern and monetary authorities must not react insufficiently or hesitantly, European Central Bank Governing Council member Joachim Nagel said on Thursday.

In a speech at a conference on monetary policy and expectations of households and firms, Nagel, who heads the German Bundesbank, argued that there were price stability risks, citing the ‘somewhat less anchored’ nature of German households’ and firms’ expectations of average inflation over the next five years.

The increase in these expectations was ‘worrying’, he said.

The Bundesbank also examined long-term expectations of professional forecasters and the expectations incorporated in financial markets, he said. ‘So far, the average levels of these measures are still close to 2%, but there are initial signs of above-target revisions, and according to some empirical approaches, the risk of inflation expectations becoming de-anchored has risen over the past months’, he said.

Second-round effects associated with higher short-term inflation expectations could make currently elevated inflation more persistent, and external risks have not disappeared, he reminded.

The ECB ‘must ensure that elevated inflation does not become entrenched in the medium run’, he said.

Reiterating the ECB’s latest decisions, Nagel noted that the September rate hike could be more than 25 basis points, depending on the inflation outlook. ‘Currently, in my view, central banks must not respond with too little, too late’, he promptly added.

‘If monetary policy falls behind the curve, even stronger hikes in interest rates could become necessary to get inflation under control’, he argued. ‘This would create much higher economic costs.’

Inflation expectations are also influenced by the speed with which monetary authorities act, he observed.

‘We need to give households and firms clear and timely signals that we are determined to ensure price stability’, he said. ‘Such signals contribute to lower inflation expectations and help bring inflation back to target.’