The German Federal Bank on Wednesday lowered its 2023 inflation forecast slightly to a maximum of 7% this year, 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 forced an unprecedented turn in the monetary policy led by the European Central Bank (ECB) with a rise in its rates of 3 percentage points since July.
The institute announced in February that it will again raise its rates by 0.5 percentage point in March, the questions relating to the continuation of the monetary tightening.
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.
Even higher policy interest rates are needed to bring the inflation rate back to our 2% target in due course, he argued.
Until that happens, rate cuts are not on the agenda, according to Nagel.
While he believes that both the real economy and financial markets have been resilient to monetary policy tightening to date, acting hesitantly now, ending (rate) hikes earlier, or even easing them, would be a Big mistake, he concludes.
The Bundesbank reported a nil net result for 2022 on Wednesday.
Interest rate hikes have indeed forced central banks in the euro zone to pay interest on commercial bank deposits at its counter, digging into its accounts.
On the other hand, receipts on its bond portfolios collected during the years of low interest rates remained almost stable.