(Reuters) – The European Central Bank (ECB) may still have to raise rates significantly beyond March as inflation, especially the core version, is too high, the ECB chairman said. Bundesbank Joachim Nagel.
The inflation rate, excluding energy, unprocessed food, alcohol and tobacco, reached a record 5.3% year on year last month, raising the risk that headline inflation will last longer in above the ECB’s 2% target.
“What seems obvious to me is that underlying inflation will remain at a very high level beyond March”, declared Joachim Nagel, member of the Governing Council of the ECB, on the sidelines of the meeting of the G20 in India.
“That’s why I don’t rule out that further significant interest rate hikes beyond March are needed.”
The ECB has already promised to hike rates by half a basis point next month, taking its deposit rate to 3%, and markets are now pricing in a further 75 basis point hike before the end of the summer.
But ECB officials classed as doves, proponents of accommodative policy, particularly those in the southern euro zone, are calling for more measured measures, arguing that rates are now limiting economic growth.
Joachim Nagel, considered a “hawk”, thinks that rates are not yet restrictive, unlike his counterpart at the Banque de France, François Villeroy de Galhau.
A neutral rate, which neither stimulates nor slows down the economy, can only be estimated and while most officials have placed it in the past between 1% and 2%, many now say that it is in fact more high given the evolution of the economy.
Stopping the monetary tightening cycle too early would be a “fundamental error”, added Joachim Nagel.
(Francesco Canepa; written by Balazs Koranyi, French version Laetitia Volga, edited by Kate Entringer)
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