ECB Rate Hike Cycle ‘Different’ Due to Lack of Labour Market Reaction, Nagel Says

7 July 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – The labour market is not reacting as expected to the European Central Bank’s latest hiking cycle, ECB Governing Council member Joachim Nagel said on Friday.

Speaking on a panel at the Deutsche Bundesbank, which he heads, Nagel said that ‘the labour market function is a little bit different from what I realised [sic] over the last decades.’

‘We hiked rates eight times, we started at a full employment level, and there is still full employment’, he said, adding that ‘this interest rate cycle is a little bit different from what we had in the past.’

The evidence seemed ‘to be pretty obvious that the Philips curve is flat, or is flatter than in previous periods’, he noted.

Regarding second-round effects, he said that ‘the push came not from the wage side, it came from the price side.’ It was important that this impulse did not feed into excessive wage demands: ‘Let’s not make it again to a wage price spiral, I think this is the art of monetary policy, that this does not occur.’

Forward guidance was unlikely to return to the ECB soon, he said: ‘I believe constructive ambiguity serves much better than forward guidance, and I believe we are in such a period.’

‘If you give market participants too much indications what you are trying to do, they are starting to fight against you, and that I believe, makes things even more difficult’, he argued.