ECB’s Nagel: Need Further Decisive Steps; Mustn’t Be Lulled Too Quickly into Letting up
18 November 2022
By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Joachim Nagel on Friday called for additional decisive monetary policy action, saying that initial unclear indications of lower price pressures shouldn’t lull the ECB into relaxing.
In a speech at the European Banking Congress, Nagel, who heads the German Bundesbank, said that central banks were required to ‘prove how determined they are to attain price stability’ and that ‘strong determination now will pay off many times over in the medium and long term.’
‘With three major policy rate increases in a row, we have made important steps on the path of monetary policy normalisation’, he said. ‘But we cannot stop here. Further decisive steps are necessary.’
The environment was one of ‘inflation projections way above our target and upside risks to inflation’, under which circumstances ‘the current policy rate level cannot ensure a timely return of inflation to our 2% target’, he said.
Policy was currently still expansionary, he said. In any case, ‘a mere normalisation of monetary policy might not be enough’, he said. ‘If high inflation threatens to become entrenched, we must resolutely raise our key rates further and adopt a restrictive stance.’
The higher total cost of failing to act decisively now and then having to tighten more later justified remaining resolute without fear of an economic downturn, he said.
Authorities are monitoring economic developments closely, he said, concurring that these could, if they weaken, reduce price pressures. ‘But as far as we can see, this development in itself is insufficient to put inflation back on track’, he said.
‘It would be wrong to slacken our efforts at the first vague signs of an easing of price pressures’, he said. ‘We have to ensure that high inflation actually ends. Therefore, monetary policy must not let up too soon.’
As he did in a speech eight days ago, Nagel again criticised the contradiction of maintaining ECB asset programmes that depress bond yields while simultaneously boosting short-term rates via conventional monetary policy.
‘In my view, we should start reducing the size of our bond holdings at the beginning of next year by no longer fully reinvesting all maturing bonds’, he said. ‘The additional tightening would help to bring inflation down. And it would underline our strong determination to bring inflation back to our target.’