ECB’s Nagel: Reinvestment of Maturing Securities Runs Counter to Our Monetary Policy Orientation

10 November 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Joachim Nagel on Thursday said that reinvestments of maturing assets did not correspond to the ECB’s general attempt to normalise monetary policy.

In a speech at the Karlsruhe Economic Club, Nagel, who heads the German Bundesbank, said that additional interest rate hikes were coming. ‘We still need to act decisively to fight inflation’, he said.

The ECB’s balance sheet is also part of the monetary policy change of course, he said, observing that the reinvestment of securing maturities was in fundamental contradiction to the new orientation of ECB monetary policy.

‘In my opinion, it does not fit together to move interest rates at the short end of the market in one direction and to influence those for longer maturities in the other direction’, he said. ‘When you have two instruments for normalising monetary policy, it doesn't make sense to use only one of them.’

Given the lag with which its measures unfold their full impact, monetary policy needs time to change double-digit inflation, he said. German inflation was thus likely to exceed 8.5% on average in 2022, and ‘remain far too high at over 7%’ next year, he said.

‘Monetary policy will ensure that price stability prevails again in the euro area in the medium term’, he continued. ‘The decisive factor is: First, inflation expectations must remain anchored. Secondly, there must be no price-wage spirals.’

The chain reaction higher inflation is triggering must be interrupted as quickly as possible, he said, as ‘unanchored inflation expectations or price-wage spirals would mean that even more dominoes would fall over.’

Nagel said that the German economy would contract in the second half of 2022, mainly due to a worsening of supply conditions related to Russian military aggression.