ECB’s Nagel: Must Continue Normalising Policy, ‘Even if Our Measures Dampen Economic Growth’
8 November 2022
By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Joachim Nagel on Tuesday called for continued monetary policy tightening even if slower growth were a consequence.
In a speech at a symposium of the German Bundesbank, which he heads, Nagel said that ‘[f]urther interest rate increases are necessary to bring the inflation rate back to 2%.’ The pace and endpoint of the tightening depended on incoming information and the outlook, he said.
‘However, monetary policy normalisation is about more than just raising key interest rates’, he continued. The ECB’s vast bond holdings ‘continue to push euro area bond yields down significantly.’
Monetary authorities ‘must ensure that the high rates of inflation come to a swift end’, he said, as the persistence of elevated HICP increases the risk of that longer-term inflation expectations will head upwards and complicate the job.
‘I will therefore continue to do all I can to ensure that we, as the ECB Governing Council, do not – under any circumstances – let up too soon, that we press ahead with monetary policy normalisation with determination – even if our measures dampen economic growth’, he said. ‘Because in a situation where monetary policy lags behind the curve, the macroeconomic costs would be significantly higher.’
High inflation was harming euro area economic performance, he said, especially via its impact on private consumption. German inflation would probably stay high ‘for some time to come’, he said, with a seven before the decimal point next year on average.
‘And the risks are clearly tilted to the upside given the tensions in energy markets’, he said.
‘Price pressures are broad-based at the euro area level as well’, he said. The projections are subject to error, he suggested.
‘First, tensions in energy markets could persist for longer than assumed in the forecasts’, he said. ‘Second, the still high commodity prices could be passed on to consumers to a greater extent. And third, wages could rise more strongly than expected, partly in response to inflation surprises.’
After still exhibiting good health headed into the third quarter, ‘high inflation and uncertainty surrounding the energy supply and the costs thereof dragged increasingly on the German economy’, he said. ‘Economic output could fall significantly overall in the final quarter of 2022 and first quarter of 2023.’
The severity of the recession hinged on factors subject to uncertainty, he said.