ECB’s Nagel: Current Interest Rate Hiking Cycle Not Necessarily Over

28 November 2023

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Governing Council member Joachim Nagel on Tuesday said that new interest rate increases were not ruled out if inflation did not decrease as expected.

In a speech at the Central Bank of Cyprus, a text of which was posted to website of the German Bundesbank, which he heads, Nagel said that present interest rate levels needed to be ‘maintained for a sufficiently long period’, but that this ‘does not necessarily mean that the current hike cycle is now over. Of course, it could be that, if the inflation outlook worsened, we might have to raise rates again.’

‘[I]t would be premature to lower interest rates soon or to speculate about such steps’, he said. ‘The main effect of the policy tightening on inflation is yet to unfold.’

Regardless of the encouraging outlook for the next two years, inflation had been too high for too long, he said. ‘It is thus too early to declare victory over inflation. Monetary policy has to stay the course.’

Inflation expectations had to be kept anchored to avoid a negative impact on price-setting and wage-setting behaviour and a consequent need for ‘an even stronger monetary policy response’, he said.

The ECB was aware of the concerns that the current monetary policy stance could be excessively tightened, he said.

The tight labour market was one of the pieces of evidence that mitigated concerns of overtightening, he said. ‘I am confident that we can avoid a “hard landing”’.

‘[I]t could do more harm to the economy if we were to loosen too early and then have to tighten again and even more strongly’, he said. ‘Seen from a risk management approach, I would prefer to err on the side of caution and ensure a timely return to price stability.’

There were no signs of overtightening in transmission either, he said. ‘The transmission across financial markets is currently working well. And the transmission to the real economy and to inflation is making progress.’

As underlying price pressures remained, a restrictive approach was still needed, he said.

‘Hence, we must stay on course. It is my conviction that we must not loosen policy until we are certain of returning to price stability on a lasting basis’, he said.