FRANKFURT (Reuters) – The European Central Bank may need significant rate hikes after March and must accelerate the reduction of its huge bond portfolio to curb persistent inflation, German central bank Governor Joachim Nagel said on Wednesday. .
The ECB has raised rates by 300 basis points since July and promised another big hike in March, but some policymakers have called for more moderate action after that as inflation is now below the highs reached in October.
Nagel disputed those calls, saying recent falls in energy prices could help inflation in the short term but would not affect the medium term, and price growth risks being above the ECB’s 2% target.
“The interest rate hike announced for March will not be the last,” Nagel said in a speech. “Further significant steps on interest rates may also be needed later.”
Markets currently expect the 2.5% deposit rate to peak at around 4% near the turn of the year, suggesting another 100 basis points of increases after March.
Once interest rates peak, they should remain high until the ECB is confident that inflation will return to 2%, Nagel said.
The ECB, which started reducing its 3.3 trillion euro Asset Purchase Program on Wednesday, is likely to accelerate the reduction of its balance sheet from July, he added.
The bank is now downsizing the scheme by 15 billion euros a month by not reinvesting all proceeds from maturing debt, but Nagel said it will simply take too long to significantly reduce the size of the scheme at this rate.
“Therefore, I am in favor of following a steeper path of reduction from July onwards, in light of the experience that will be gained,” said Nagel.
(Reporting by Balazs Koranyi)
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