Inflation problem not solved
Bundesbank boss demands much higher interest rates
2/7/2023 6:51 p.m
In January, inflation in the euro area fell sharply to 8.5 percent. A positive development, but by no means sufficient, says Bundesbank President Nagel in an interview: “From my current perspective, further significant interest rate hikes are needed.”
In the opinion of Bundesbank President Joachim Nagel, the European Central Bank (ECB) should not move away from raising the European key interest rate even after March. Nagel says in the “Börsen-Zeitung” that he currently does not see that the interest rate step in March means that the work is done. “I believe we need to raise interest rates further to provide the necessary braking effect to bring inflation back down to 2 percent quickly and sustainably,” he added.
If the central bank eases too early, there is a great risk that inflation will become entrenched. “From my current perspective, further significant rate hikes are needed.”
Fifth increase in a row
At its first interest rate meeting of the new year on Thursday, the ECB raised its key interest rate again by half a percentage point to 3.0 percent. It was already the fifth interest rate hike in a row and the tightening course is to be maintained. ECB President Christine Lagarde also announced a further hike of 0.50 percentage points at the next interest rate meeting on March 16.
Inflation in the euro zone fell from 9.2 percent in December to 8.5 percent in January as a result of a slowdown in energy price increases. It was the third consecutive monthly decline. However, the core rate, which excludes the volatile prices of energy, food, alcohol and tobacco, remained at the December level of 5.2 percent.
Refusal to cut interest rates
Although it is gratifying that inflation has recently fallen, said Nagel. For the time being, however, it is still much too high. “The drop to 8.5 percent in January was almost celebrated by some. I don’t understand that,” he noted.
Nagel referred to the core rate. This is currently showing that inflation is eating its way through the economy and is gaining in breadth. “We can’t like that. We mustn’t let up now, even if energy has become cheaper recently,” he explained. Price stability is far from being achieved. “For the foreseeable future, interest rate cuts are not on my agenda at all.”
advance step by step
From Nagel’s point of view, however, it is correct that the ECB is advancing step by step on its course. There are too many unknowns, the biggest of which is Russia’s war. “It would be dangerous to think that we are already through and that the inflation problem is over,” said Nagel. Inflation has not yet been overcome.
The Bundesbank President also doesn’t think much of the idea of raising the central bank’s inflation targets. In his view, this would undermine the credibility of the central banks and thus damage price stability.
Nagel also considers it possible that inflation in Germany will be slightly lower this year than the 7.2 percent last forecast by the Bundesbank in December. “If you take the current numbers, you might end up somewhere between six percent and seven percent,” he said. The economic development in Germany is significantly better than feared. In 2023, the economy could roughly stagnate instead of falling into recession. Nagel was optimistic: “I don’t see a ‘hard landing’.”