ECB’s Nagel: ‘We Need to Take Further Action’

2 January 2023

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Joachim Nagel on Monday said that monetary authorities’ job was not yet finished and that further rate hikes were required.

In an interview with a German banking and finance sector journal, Nagel, who heads the German Bundesbank, said he had ‘no doubt that stable prices will be restored’, noting the ECB’s ‘decisive action’ to date.

However, with the lag needed by monetary policy to exert its full impact, even the slowdown of inflation expected this year, in 2024 and 2025 would be ‘not yet at a sufficiently strong pace to reach our target of 2%’, he said. ‘For me, that means our job is not done yet. We need to take further action.’

Although rate hikes imposed an economic cost, they were necessary ‘to face up to this multifaceted situation and ensure that the high inflation comes to an end and does not become entrenched’, he said.

Longer-term expectations of inflation among financial experts were ‘now perceptibly higher, but still close to 2%’, he said. There were risks, though, with medium-term expectations reacting more and more strongly to current inflation readings, he said.

‘Another thing that concerns me is that our monthly surveys of firms and households are showing a significant increase in long-term inflation expectations as well’, he continued. ‘I firmly believe that we need to take further monetary policy action to halt and reverse this trend.’

Being too hesitant lest growth suffer would be wrong, he said, as it would lead to even more tightening at higher economic cost later.

Trade unions were currently making relatively high wage demands, but these have historically been higher than actual agreements, he said, and most wage settlements so far have been less than the inflation rate.

‘So we’re not seeing any sign of a wage-price spiral at present in the sense of current wage settlements adding to inflation – if anything, it’s more of a price-wage spiral’, he said. ‘Even so, there is a distinct risk of stronger second-round effects because the higher wage deals that are being reached could prolong the prevailing period of high inflation rates.’

Nagel said he was ‘optimistic that Germany will be able to avoid a severe economic slump and we will get off lightly with a mild downturn. And I am confident that we will be able to tame the high rate of inflation over the medium term.’