The German Federal Bank slightly lowered its inflation forecast for 2023 on Wednesday, to a maximum of 7%, but remains firm on the need to continue raising rates in the euro zone.
For Germany, Bundesbank experts expect an average inflation rate of between 6 and 7% in 2023 according to the harmonized ICPH index, said the President of the Federal Bank, Joachim Nagel, in a press release.
The previous forecast in December projected a rate of 7.2%.
Last year, inflation in Europe’s largest economy averaged 8.7% (ICPH), a level unheard of in 70 years.
In 2024 and possibly also in 2025, inflation rates (including the rate excluding energy and raw materials) will fall further but will still be well above the 2% mark, Nagel continued.
The war in Ukraine led to extreme increases in the prices of energy and food products last year.
This led to an unprecedented turn in the monetary policy pursued by the European Central Bank (ECB), with its rates rising by 3 percentage points since July.
The institute announced in February that it would further raise its rates by 0.5 percentage point in March, the questions relating to the continuation of the monetary tightening.
Rate hikes
One thing is clear: the rate hike announced in March will not be the last, assured Mr. Nagel, a hawk adept at a strict monetary cap.
There is no doubt that the monetary tightening in the euro zone must continue, for his part declared on Wednesday the governor of the Bank of Italy Ignazio Visco, yet ranked among the doves in favor of measures supporting the economy, during a speech in front of Frankfurt students.
According to him, it is necessary to ensure that a temporary increase in inflation caused by a supply shock does not become a more persistent phenomenon supported by demand.
This means, according to Mr. Nagel, that even higher key interest rates are necessary for the inflation rate to return to our target of 2% in due course.
Until that happens, rate cuts are not on the agenda, he said.
While he believes that the real economy and financial markets have withstood the tightening of monetary policy well to date, to act hesitantly now, to end (rate) hikes earlier, or even to ease them, would be a serious mistake, he concludes.
The Bundesbank reported a nil net result for 2022 on Wednesday.
Interest rate hikes have forced eurozone central banks to pay interest on commercial bank deposits at its counter, sinking its accounts.
On the other hand, receipts on the bond portfolios collected during the years of low interest rates remained almost stable.