‘Several More Interest Rate Steps Will Be Necessary’, ECB’s Nagel Says

23 May 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – The European Central Bank needs to hike rates several more times in its fight against inflation, Governing Council member Joachim Nagel said on Tuesday.

Speaking at a conference hosted by the German centre-right CDU party in Berlin, Nagel, who heads the German Bundesbank, said that ‘there should be no doubt: the monetary tightening course has not reached its end. Several more interest rate steps will be necessary to achieve a sufficiently restrictive level.’

‘And we will have to maintain this level for a sufficiently long time until inflation has substantially declined’, he added.

Despite the recent decline in headline inflation, core inflation remained ‘persistently high’, he said, with recent data showing ‘that the surge in prices is now widespread.’

‘[L]et me make it clear: our job is not yet done’, he said. ‘[C]urrently exceptionally high and persistent inflation demands decisive action from monetary policy.’

Central banks needed ‘the necessary leeway to make unpopular decisions’, he argued. ‘When we look at the current situation, it becomes clear what this can mean.’

He noted that ‘not everyone is pleased’ with the ECB’s rate hikes, ‘especially since a restrictive interest rate level inevitably dampens economic activity; otherwise, it wouldn't be restrictive.’ This was why monetary policy needed to be made independently, with ‘price stability the guiding principle of its actions.’

Whilst ‘central banks are primarily called upon to send clear and credible signals through their policy decisions and communication’, fiscal policy makers ‘should not create additional price pressure in the current environment’, he said.

Furthermore, ‘unsound public finances can significantly impede a stability-oriented monetary policy’, he said. This was why the EU’s fiscal rules ‘should not be "reformed" in a way that would further weaken them.’