The Bundesbank President believes that a turnaround in interest rates is possible in the current year.
(Photo: dpa)
Frankfurt Bundesbank President Joachim Nagel is urging the ECB to react quickly to the high inflation and believes that a turnaround in interest rates is possible this year. “If the picture does not change by March, I will advocate normalizing monetary policy,” said the economist, who took over as head of the German central bank in January, in the weekly newspaper “Die Zeit”, according to the preliminary report on Wednesday.
“In my estimation, the economic cost of acting late is significantly higher than if we act early,” he added. This has also been shown by past experience. Otherwise, he warned of severe consequences on the markets: “If we wait too long and then have to act more massively, the market fluctuations can be stronger.”
Nagel said his experts were expecting a price increase of “well over four percent” on average for Germany in 2022. He said he might raise interest rates later this year. First, however, the purchases of government and corporate bonds would have to stop. “The first step is to end net purchases of bonds throughout 2022. Then interest rates could rise this year,” he said.
After the ECB Council meeting last Thursday, ECB President Christine Lagarde did not repeat her earlier assessment that a turnaround in interest rates in 2022 was very unlikely. Experts take this as a signal that the central bank could tighten its monetary policy faster than previously planned.
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As recently as December, the ECB had decided to only slowly reduce its bond purchases this year. A complete end to net purchases is considered a prerequisite for a rate hike. If the ECB reduces its purchases more quickly, the way for a rate hike would be clear earlier.
High inflation causes change of direction
The reason for the change in direction is high inflation. It was higher than expected in January. In Germany, it fell only slightly to 4.9 percent. Economists had actually expected a stronger decline due to the expiry of special effects. In the euro area, it even rose slightly to 5.1 percent, although the method of calculation differs somewhat from that of the Federal Statistical Office. By far the strongest price driver is currently energy.
The ECB will present new inflation forecasts at its next monetary policy meeting in March. These are expected to be higher than in December.
In response, it could then announce a faster reduction in its bond purchases – and thus keep the option of rate hikes open this year. The US investment bank Goldman Sachs expects the ECB to announce in March that it will end its net purchases in June. It then expects rate hikes in September and December of 0.25 percentage points each. The deposit rate, which is decisive for monetary policy, is currently minus 0.5 percent.
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