ECB’s Nagel: Must Not Loosen Policy Until Certain of Price Stability

17 November 2023

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Governing Council member Joachim Nagel on Friday said that the ECB had to keep monetary policy tight until price stability was achieved.

In a speech at the European Banking Congress (EBC), Nagel, who heads the German Bundesbank, said that ‘we must not loosen policy until we are absolutely certain of returning to price stability on a lasting basis’, which was not the current scenario, he noted.

‘To avoid the economic damage caused by inflation being too high for too long, we need to restore price stability. As of now, it is too early to declare victory over inflation’, he said.

 ‘[M]uch of the inflation-dampening effect induced by monetary tightening is yet to materialise’, in which context ‘it would be unwise to start cutting interest rates too soon’, he said.

‘Now we need to be patient and stay the course to reap the benefits of the tightening in terms of disinflation. Key interest rates will therefore have to remain at a high level for a sufficient period’, Nagel said.

Though hard to say how long ‘a sufficient period’ meant, it was ‘highly improbable that it will end anytime soon’, he said.

The effects of monetary tightening on demand did not ‘necessarily mean inducing a recession’, he said. ‘It is encouraging that the monetary tightening is affecting the real economy.’

‘I am optimistic that we can avoid a hard landing of the economy, because several factors are moderating transmission: unusually stable, and also tight labour markets, favourable indebtedness levels among firms and households, and strong investment activity’, he said.

While geopolitical tensions made the outlook uncertain, incoming data and projections would contribute to the next Governing Council decision in December, he said.

‘Our future decisions will continue to be based on our assessment of the medium-term inflation outlook in light of the incoming data, the dynamics of underlying inflation, and our assessment regarding the strength of monetary policy transmission’, he said.