Far From Certain That ECB Rates Will Peak This Summer, Nagel Says

5 June 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank Governing Council member Joachim Nagel said on Monday that he considered it far from certain that interest rates would reach their peak this summer.

In a speech at Ruhr University in Bochum, Germany, Nagel, who heads the German Bundesbank, said the ECB should hike its key interest rates several more times before maintaining them at a sufficiently restrictive level for long enough to return inflation to 2%.

‘In my view, it is by no means certain that interest rates will reach their peak as early as this summer’, he said.

‘As things stand, several interest rate steps are still needed’ to achieve a ‘sufficiently high interest rate level’, which should then be maintained ‘until we can be sure that we will achieve our 2% inflation target in a timely manner’, he told attendees.

Despite the recent fall in both headline and core inflation in the euro area, it was ‘still too soon to speak of stable prices’, he said, as underlying price pressures were ‘far too high, and have hardly receded at all to date’. He promised that ‘I will do my utmost to ensure that this period of high inflation is soon behind us.’

Current inflation data meant that central bankers ‘cannot and will not falter in the fight against inflation. We need to be even more stubborn than the current rate of inflation’, he said.

In order to support its rate hikes, the ECB ‘must run down the bond holdings on our balance sheets’, he said. ‘This balance sheet reduction will run parallel to our interest rate hikes. As from July, we plan to increase the speed of this shrinkage – a step that I am very much in favour of. Measures such as this will help us to leave the wave of inflation behind and return to a stable framework.’

He noted that despite the current technical recession in Germany, ‘the decline in economic output is of the same magnitude expected in the Bundesbank’s December 2022 forecast.’

With regard to the outlook for the German economy for the  rest of 2023, the Bundesbank was ‘cautiously optimistic’, he said, predicting that ‘[t]hings should start to pick up again soon’.