ECB Must Be Bold and Decisive To Tame Inflation, Nagel Says

22 March 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank Governing Council member Joachim Nagel said on Wednesday that the central bank’s job was not done yet and that bold action would be necessary to tame inflation in the euro area.

In a speech in London, Nagel, who heads the German Bundesbank, warned that the risks to the Eurozone inflation outlook were still tilted to the upside.

‘We have to tame inflation, and to do so, we have to be bold and decisive’, he said. ‘In my view, our job is not done yet. If inflation develops as projected, further interest rate hikes have to follow in upcoming meetings.’

The inflation outlook ‘still contains significant uncertainty, and in particular upside risks’, he said. High commodity and production prices ‘could be passed on to consumers to a greater extent than previously expected’ and wages ‘may increase even more strongly than assumed in the projections.’

A major focus of his speech was the role of fiscal policy in the euro area in fighting inflation. Although fiscal space had been gained because less energy subsidies were needed than previously predicted, ‘[i]t would be highly advisable not to use this kind of fiscal relief for other purposes like other expenditure or tax cuts’, he said.

He argued that ‘it is important that in the euro area, the size of fiscal policy support is reduced as soon as possible.’

Furthermore, ‘financial markets have to play their part by pricing sovereign risks adequately and thereby support fiscal discipline’, he said. ‘Borrowing at European Union level to finance current expenditure, such as with Next Generation European Union transfers, should remain an exception.’

‘Capital market disciplining would be helpful’, he said, because ‘potentially rising risk premia for government debt constitute a significant incentive for sound fiscal policy.’