Interest rates need to rise further still Interview in Spiegel Online

Interview with Joachim Nagel conducted by Tim Bartz and Stefan Kaiser
Translation: Deutsche Bundesbank

Mr Nagel, inflation rates in Germany and Europe are falling surprisingly sharply. Is it still right for the European Central Bank (ECB) to be raising its key interest rates by 0.5 percentage point in both February and March, as it announced in December?

Calling an end to the high inflation right now risks jumping the gun. The drop in the inflation rate in December did not come as a surprise. In part, this was because gas consumers in Germany had their monthly bill paid for them. Although inflation has fallen, it is still far too high. And if you look more closely, it is no longer just about energy prices. Price pressures are much more broadly based.

How do you mean?

Core inflation – the rate that strips out the more volatile energy and food prices – is a better indicator of the price trend. And that core rate has been rising more or less steadily since last summer, climbing to 5.2% in the euro area and 5.4% in Germany in December. That's also why I see no reason to change any aspect of the path mapped out by ECB President Christine Lagarde. We are, after all, still a long way off the target inflation level of 2%.. 

How long will it take you to push inflation back to that target rate?

According to our December projections, euro area inflation will probably not return to 2% until some time during 2025. That’s just over two years off. What’s more, I still see a risk to the price outlook that inflation could come in higher than expected. This outlook is another reason why our announcement at the Governing Council's December meeting remains the right one: interest rates need to rise further still. 

So how much further will interest rates have to rise for the ECB to tame inflation?

 I’m not going to name any specific interest rate level. We announced that we are going to raise interest rates significantly once again in February and March. After that, we will take a look at where inflation stands in the first quarter and what our staff projections look like then. I wouldn't be surprised if, even after the two steps already announced, we have to raise key interest rates further. The most important key interest rate at present currently only stands at 2%. And inflation, just like core inflation, is still very high. 

A slightly unorthodox question: What's the point of having ECB Governing Council meetings in the first place if it is clear from the outset that the central bank is going to raise interest rates by 0.5 percentage point in both February and March? 

There’s a little more to it than that. We need to take a detailed look at current developments and the incoming data at regular intervals. Right now, for instance, we are seeing the economy holding up more robustly than had been expected just a few months ago. At our Governing Council meetings, we exchange views and analyse what these and other developments mean for the price outlook and therefore for monetary policy. And these discussions are hugely important. Last year showed that this approach helps us make good decisions. We are taking decisive action to tame the high inflation.

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