Nagel Repeats ECB Could Continue With ‘Significant’ Steps Beyond March, Calls for QT Increase

1 March 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank Governing Council member Joachim Nagel said on Wednesday that further significant interest rate steps might be necessary after an expected 50bp hike in March.

Speaking at a press conference at the headquarters of the Deutsche Bundesbank, which he heads, Nagel called for the ECB to step up the reduction of its balance sheet this summer.

‘One thing is clear’, he told reporters: ‘the interest rate step announced for March will not be the last. Further significant interest rate steps might even be necessary afterwards, too.’

There was ‘still a long way to go’ on rate hikes, he said in response to a question from Econostream.

There was ‘no reason for supplying the financial system over the long term with such ample liquidity as is being provided now’, he said. He was ‘therefore in favour of taking a steeper path of reduction starting in July in light of experience gained up to that point.’

Markets would ‘cope well with the reduction in the Eurosystem’s asset holdings’, he predicted. He did not foresee active sales of bonds from the ECB’s balance sheet, however.

'Although the recent decline in energy prices will affect the short-term outlook, it will initially have no essential bearing on the medium-term projections’, he said.

‘What the numbers show us is that underlying price pressures remain very high’, he said. ‘Although we also assume that the wave of inflation has peaked, we are expecting the inflation rate to fall only gradually.’

To fight inflation, interest rates would have to rise to a ‘sufficiently high level’, he said. The ECB would ‘need to maintain that level until such time as the data and projections provide us with sufficient evidence that inflation is returning to our medium-term target of 2%.’

‘This also has to be reflected in underlying inflation’, he said. ‘Until that is the case, interest rate cuts are a non-starter.’

Other Governing Council members have emphasised in recent days that a sustained turnaround in underlying inflation dynamics would be necessary for the ECB to return to a more neutral monetary policy stance.

The recent fall in inflation expectations seen in consumer surveys was in part due to the ECB’s rate hikes, he said: ‘I am convinced that expectations have fallen because, amongst other factors, the respondents are convinced of our resolve.’