Bundesbank head affirms ECB anti-inflation drive, not excluding new rate hikes
08:22 - 29 November 2023
President of the German Bundesbank Joachim Nagel pointed out the need for the Eurosystem's tight monetary policy to continue, in order to address underlying strong price pressures.
Speaking during a 28 November event in Nicosia, during a visit at the invitation of Cyprus Central Bank’s Governor Constantinos Herodotou, the President of the Bundesbank underlined the crucial role of interest rates as the primary tool in combating high inflation. As he said, in the current assessment of the European Central Banks’ Governing Council, the interest rates are deemed to be at levels that will significantly contribute to bringing inflation back to the target in a timely manner. However, Nagel, who is also a member of ECB Governing Council emphasised that these levels must be maintained for a sufficiently extended period.
Despite the current stance, Nagel hinted that the ongoing cycle of rate hikes might not necessarily be over. “Moreover, that does not necessarily mean that the current hike cycle is now over. Of course, it could be that, if the inflation outlook worsened, we might have to raise rates again. The opposite case – inflation returning much faster to 2% – seems much less probable to me”, he said.
The President of the Bundesbank cautioned against premature speculation about lowering interest rates. The emphasis, as he said, was not solely on the current level of interest rates but also on managing expectations regarding their future trajectory.
Nagel reaffirmed the European Central Bank's (ECB) commitment to achieving lasting price stability.
“The main effects of the Eurosystem’s policy tightening on inflation are yet to unfold. They are still needed – as underlying price pressures are still strong. Hence, we must stay on course. It is my conviction that we must not loosen policy until we are certain of returning to price stability on a lasting basis”, he said in his speech.
Highlighting the persistence of inflation, he compared it to a "greedy and stubborn beast," while expressing confidence in ECB ability to tame inflation effectively.
Nagel also stressed the importance of a coordinated approach with fiscal policy. He called for a return to a "decent fiscal policy" and highlighted the need for political leaders in Europe to collaborate.
While headline inflation has fallen in recent months, being slightly below 3% in October, the Bundesbank President cautioned against taking the decline for granted.
Emphasising the importance of a timely return to the 2% inflation target, he linked it to maintaining stable inflation expectations. Failing to achieve this, he warned, could impact price-setting and wage-setting behaviour, necessitating a stronger monetary policy response.
Looking ahead, he outlined the three pillars guiding future decisions: assessment of the medium-term inflation outlook, dynamics of underlying inflation, and evaluation of the strength of monetary policy transmission.
“As regards the transmission, I do not see an overtightening. The transmission across financial markets is currently working well. And the transmission to the real economy and to inflation is making progress”, he said.
In response to concerns about ECB monetary policy stance being too restrictive, the president remained unconvinced, citing confidence in avoiding a "hard landing."
“…I am confident that we can avoid a 'hard landing'. The tight labour market, low corporate and household debt levels and brisk investment activity suggest that the conditions for a 'soft landing' are in place”, he said.
He also disclosed that the next Governing Council meeting in December would be informed by new staff projections. These projections, as he said, would play a crucial role in shaping future monetary policy decisions.
You can read Nagal's full speech, in English, here
Cyprus Central Bank Governor stresses dedication to price stability amid challenges
In his speech, the Governor of the Cyprus Central Bank, also a member of ECB Governing Council, commended the ECB's recent monetary policy actions as a testament to its commitment to price stability. Acknowledging the challenges faced and rewards gained, Constantinos Herodotou stressed the need to remain dedicated to adapting policies to meet the ever-changing economic environment, always with the aim of fostering price stability for a prosperous euro area.
“The ECB's actions have not only been effective in steering towards the price stability objective, during these turbulent times, but have also enhanced the credibility of our policy interventions. This credibility is fundamental in ensuring the continued effectiveness of our monetary policies and in maintaining the confidence of the markets and the public”, he said.
The Governor of the Cyprus Central Bank stressed the need for a collaborative approach between fiscal and monetary policies to effectively address the challenges posed by inflation. He underscored that fiscal policy should not work against monetary policy.
While acknowledging the vulnerable segments of European society in need of support, the Governor also emphasised the importance of targeting the productive sectors of the economy. The Governor emphasised that fiscal policy should be tailored to assist vulnerable citizens. This targeted approach, according to the Governor, is crucial to preserving social cohesion.
The Governor also highlighted the necessity for fiscal policy to be both complementary and inclusive, covering the heterogeneity between euro area members.
Addressing the significance of the ECB's monetary policy, the Governor emphasised its pivotal role in preventing a self-fulfilling spiral of rising prices and wages, contributing to the overall economic stability of the euro area.
Highlighting the ongoing energy crisis, the Governor underscored the importance of expediting the green transition. The Governor pointed out the necessity of policymakers, including central bankers, being prepared to address challenges arising from the green transition. As he said rising carbon prices and increased costs of raw materials due to green technologies could lead to a period of high energy prices.
The Governor highlighted the ECB's proactive approach. As he said the latest ECB monetary policy strategy review incorporates climate considerations, outlining a roadmap for climate change-related measures. This includes the development of new macroeconomic models, the introduction of new indicators for green financial instruments, and climate stress tests for banks in the euro area.