The President of the Bundesbank wants to vote for a rate hike at the ECB meeting.
(Photo: dpa)
Eltville Bundesbank President Joachim Nagel considers an initial rate hike by the ECB in July to be sensible if the current surge in inflation continues. In the current environment, it is all the more important that central banks act in good time, Nagel said at a Bundesbank event in Eltville on Tuesday. “As inflation continues to rise in the euro area, we must act,” he said.
He expects the bond purchases by the European Central Bank (ECB) to expire at the end of June. “And if both the incoming data and our new projections confirm this view in June, I will argue for a first step towards normalizing ECB rates in July.”
Now is the time to do something, Nagel said. “The window of opportunity is now in place to really show why we’re here,” he added. The central bank must target inflation and lower inflation expectations towards two percent. “I think we can really do this,” he said.
“My preference would be to have the first rate hike in the euro system in July of this year.” Other ECB decision-makers, including Executive Board members Fabio Panetta and Isabel Schnabel, also believe that a rate hike in the summer is possible.
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The head of the Finnish central bank, Olli Rehn, also recently spoke out in favor of a rate hike in July. Austria’s head of the central bank, Robert Holzmann, recently thought that up to three interest rate hikes this year were possible in view of the high inflation. The last time the ECB raised interest rates was in 2011.
Europe’s currency watchdogs have already signaled that they want to decide on an end to net bond purchases at the Council meeting on June 9th. According to the ECB, the cessation of purchases is a prerequisite for interest rate hikes.
>>> Read here: “We will do what is necessary” – ECB Director Schnabel announces a turnaround in interest rates
The next thing he wants to achieve is to move the deposit rate back into positive territory, Nagel said. And the focus of monetary policy must then be shifted away from the deposit rate and back to the key interest rate. The deposit rate in the euro area is currently minus 0.5 percent. At a rate below zero percent, banks have to pay penalty interest if they park excess funds with the central bank. The key interest rate is currently 0.0 percent.
Nagel warns against delaying the turnaround in interest rates
The ECB Council is currently the only currency guardian, Klaas Knot, the head of the Netherlands central bank, who has already experienced an interest rate hike at a meeting, said Nagel. “I think our job isn’t just to cut interest rates,” he added. “It is our job to raise interest rates under certain circumstances.” That time is now. According to Nagel, the steps should be predictable, gradual and data dependent.
Inflation in the euro zone had soared to a new record high of 7.5 percent in April. This puts the ECB under increasing pressure to act. In addition, inflation expectations on the markets had risen sharply.
“Delaying a monetary policy turnaround is a risky strategy,” warned Nagel. The more inflationary pressures spread, the greater the need to initiate a very large and abrupt rate hike. Companies and households would then be overburdened.
Economists expect that the central bank will probably raise the negative deposit rate to zero percent in several steps this year. Currently, banks have to pay 0.5 percent interest when parking money with the ECB. As a result, the key interest rate in the euro area, which has been at a record low of zero percent for more than six years, could rise again.
More: ECB Governing Council member Rehn: Rate hike in July “due”