The European Central Bank (ECB) will need to make further interest rate hikes – and not just at this month’s monetary policy meeting – to bring inflation back to 2% over the medium term. The assessment is by Joachim Nagel, head of the ECB and president of the Bundesbank, participating in an event by DZ Bank and OMFIF this Saturday.
“The size of interest rate adjustments and how high we raise interest rates will be determined in each case by the current data and its importance to the inflation outlook,” said Nagel.
The leader assesses that the Governing Council “acted decisively” with the recent interest rate hikes, starting in July – the first increase since 2011. Since then, in addition to the 0.5 percentage point increase in July, the ECB announced a rise of 0.75 percentage point in September.
“The Governing Council must not give up too soon. Because we have to ensure that high inflation ends. The longer inflation remains high, the greater the risk that longer-term inflation expectations will exceed the European system’s target,” said Nagel. “If inflation expectations were to unlink on the positive side, interest rates would have to rise even faster or higher. And the macroeconomic costs of bringing inflation back to the desired level would also be higher. This is a scenario that we in the Governing Council absolutely want to avoid.”
Furthermore, the ECB official cited the International Monetary Fund’s (IMF) “World Economic Perspectives” to highlight that there are three “very clear” points: “high inflation is a broad phenomenon, affecting most of the world’s economies; an increasing share of economies are experiencing slowing growth and, among advanced economies, Germany is likely to be particularly hard hit; and third, global trade growth is slowing sharply,” he said.
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