Don’t Think ECB’s Job Is Mostly Done, Further Hikes Will Be Necessary, Nagel Says
14 April 2023
By Xavier D’Arcy – FRANKFURT (Econostream) – The European Central Bank’s fight against inflation is not even mostly done yet and more rate increases are required, ECB Governing Council member Joachim Nagel said on Friday.
In a speech at the Peterson Institute in Washington, Nagel, who heads the German Bundesbank, made the case for further ECB tightening, suggesting that an end of the tightening cycle remained distant.
‘I do not think that our job is already – or even mostly – done’, he said, adding that ‘further interest rate hikes will be required.’
He told the audience that it was ‘certainly far too early to stop raising rates or even think about lowering them.’
Only a marked improvement in the inflation outlook would change his mind, he said: ‘Unless the inflation outlook improves significantly, expect us to raise interest rates further.’ If, on the contrary, inflation proved to be ‘stubborn’, the ECB would ‘just have to be even more stubborn', he said.
In his view, risks to price stability in the euro area were ‘currently tilted to the upside’ and it was ‘not a given that we will return to price stability over the medium term.’
Underlying inflation was ‘constantly becoming broader’, he said, and inflation in the Eurozone was ‘increasingly demand-driven.’ Restoring price stability would ‘require aggregate supply and demand to be aligned’, and it was therefore ‘an intended effect’ that higher interest rates were dampening euro area demand, he said.
He dismissed fears that this could lead to a downturn. ‘[M]onetary tightening has so far caused no serious harm in the euro area’, he said. Lower demand through monetary policy would ‘not necessarily lead to a recession’, he predicted. He was ‘rather confident that we can avoid a hard landing’ in the Eurozone.
The ECB’s rate hikes ‘still have some way to go for their full effect on inflation to unfold’, he said.
The central bank estimated that the degree of pass-through from key interest rate hikes to loan rates is roughly 80%, while pass-through to GDP is around 30% and, to inflation, roughly 20%, he said.