ECB’s Nagel: Monetary Policy Still Accommodative; Must Withdraw This Stimulus Quickly
17 October 2022
By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Joachim Nagel on Monday said that the current monetary stimulus in the euro area had to be withdrawn quickly, and that policy might then have to become restrictive.
In a speech at Harvard University, Nagel, who heads the German Bundesbank, called euro area inflation ‘alarmingly high’ and warned that ‘inflation dynamics are gaining breadth’, but also said that the peak would be reached soon, with inflation ‘likely to gradually recede’ in 2023.
However, the systematic undershooting of projections mean these ‘may be a less reliable guidepost for taking the appropriate monetary policy decisions than they used to be in the past’, he said. ‘Hence, we should augment our baseline inflation forecasts with an extended risk assessment and have a close look at it.’
In any event, policymakers need to take an active approach to restoring price stability and ‘act decisively to prevent inflation from becoming entrenched in the euro area’, he said.
Nagel said that rather than pre-commit to rate hikes of a particular magnitude, the ECB would be guided by the available data at each policy meeting.
‘At the current juncture, the monetary policy stance in the euro area is still accommodative’, he said. ‘This implies that it continues to stimulate the economy, and thus inflation. Obviously, we have to withdraw that stimulus quickly. And if this is not enough to bring the medium-term price outlook in line with the 2% target, we will have to move the policy stance into restrictive territory.’
The ECB had to continue purusing normalisation ‘decisively’, he said, not relaxing ‘until price stability has been restored.’
‘There is indeed a risk of monetary tightening being stopped too early’, he warned. ‘A premature stop could result in a more prolonged period of high inflation that will require an even tighter monetary policy later on, which could then result in an even more severe recession.’
‘If central bankers act half-heartedly in their fight against inflation, they risk losing their credibility and harming their reputation’, he said. ‘Decisive monetary policy action is the only way to prevent inflation expectations from de-anchoring in the euro area.’