Interest rates

ECB could raise interest rates this year due to inflation, says new Bundesbank boss

The European Central Bank (ECB) could raise interest rates this year as high inflation proves more persistent than previously thought, Bundesbank President Joachim Nagel told German newspaper Die Zeit. .

The ECB last week reneged on its pledge not to raise rates in 2022, but also tried to temper expectations after markets quickly priced in two moves that would take its deposit rate to zero in December.

True to the Bundesbank’s historically conservative line, Nagel, who took over as head of Germany’s central bank in January, said in an interview that acting too late in normalizing policy could be particularly costly.

“If the (inflation) situation remains unchanged in March, I will be in favor of a normalization of monetary policy,” Nagel told Die Zeit. “The first step is to end net asset purchases during 2022. Then interest rates could be raised before the end of this year.”

Mr Nagel joins Dutch central bank chief Klaas Knot in openly discussing a rate hike this year which would be the ECB’s first increase in borrowing costs since 2011.

“The economic costs are significantly higher if we act too late than they are if we act in time,” Nagel said.

“If we act later, we should raise interest rates more substantially and at a faster pace. Financial markets would then react with greater volatility,” he said.

Mr Nagel also said inflation in Germany, the eurozone’s biggest economy, was expected to “significantly” top 4% this year, more than double the ECB’s 2% target and also well above the Bundesbank’s projection of 3.6%.

“There are signs that the rise in energy prices may be more persistent, that it is affecting the prices of other goods and services, and that growing demand is also behind it,” he said. the newspaper.

The ECB warned last week that inflation risks were now on the “upside”, suggesting that price growth could remain above target even in 2023, the third year in a row.

– Reuters