ECB’s Nagel: Still a Long Way to the End of the Rate Hikes; QT Could Start in Early 2023
2 November 2022
By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Joachim Nagel on Wednesday said that there remained a long way to the end of the ECB’s current hiking cycle and suggested that quantitative tightening start early next year.
In an interview with German daily Frankfurter Allgemeine Zeitung, Nagel, who heads the German Bundesbank, said that last week’s decision by the Council to hike rates by 0.75bp for the second time in a row ‘was very important in a situation where inflation in the euro area is 10.7%, which is far too high.’
‘I am convinced that this is not the end of the rate hikes’, he continued. ‘It's still a long way. Because inflation is persistent. If we want to overcome it, monetary policy must be more stubborn.’
As for QT, it was ‘very important’ that the ECB’s balance sheet be discussed, he said. ‘In fighting inflation, we also have to take into account our portfolio of bonds, which has grown massively in the last years’, he said. ‘We want to normalise monetary policy. And in doing so, we should use all instruments at our disposal.’
A reduction of the portfolio of bonds could start ‘at the beginning of next year, for example by allowing existing bonds to expire in a market-friendly way’, he said.
Nagel observed that the increasingly broad-based nature of inflation now encompassed ‘goods and services in general’ and was reflected in high core inflation.
‘Inflation could solidify’, he warned. ‘And there is a risk that long-term inflation expectations will drift away from our 2% inflation target. The task now is to act decisively, as we have done at the past three meetings.’
However, the ECB is not trying to catch up to other central banks, he said, but is simply doing what is necessary for its mandate, which is the best contribution it can make to everyone’s well-being.
‘If we don’t act resolutely now, inflation would remain high that much longer’, he said. ‘Later it would be considerably more difficult to restrain it again. And in addition, the damage would be greater.‘
Without defining the neutral rate, Nagel said it could help monetary authorities assess whether policy is constraining inflation. The ECB does not however target interest rates, but rather an inflation rate, he observed.
‘We will increase rates to the extent necessary to bring inflation securely back again to a path to our 2% goal’, he said.
A price-wage spiral is not yet apparent in Germany, but the risk of one occurring is greater, he said. ‘What’s important above all is that no one should expect inflation to remain high in the medium term’, he said. ‘We will ensure that inflation falls back to 2%.‘
The ECB is ready to deploy its Transmission Protection Instrument if need be, he said, but only in the pursuit of price stability, not to ensure favourable financing conditions for sovereigns, which must see to it that their fiscal house is in order.