ECB’s Nagel: I Consider Spreads Fundamentally Justified, Absent Evidence to the Contrary

12 July 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Joachim Nagel on Tuesday said that monetary policy normalisation would inevitably be accompanied by risk premia and that absent evidence to the contrary, he would consider widened spreads to be warranted by fundamentals.

In a speech at the Bavarian headquarters of the German Bundesbank, which he heads, Nagel said that euro area citizens can be confident that the ECB would restore price stability.

‘At the same time, we should not hide the fact that this will probably not be without strains’, he said. ‘For example, the financial markets are now again differentiating more strongly between different risks due to the change in the monetary policy outlook. I assume that these price developments are fundamentally justified as long as there is no evidence to the contrary.’

July’s 25-basis-point lift-off would be followed by a larger hike in September unless medium-term inflation prospects improved, he said. After that, incoming data would set the pace of tightening, he said.

Nagel noted that with June euro area HICP of 8.6%, ‘the series of inflation surprises has continued until recently’ and ‘the forecast error has widened again.’

‘This also increases the risk that inflation will remain higher in the medium term’, he said. ‘As the ECB Governing Council, we are judged by our words and, above all, by our deeds.’