Joachim Nagel ©Frank Rumpenhorst

Nagel: Central banks must not respond with too little, too late

Bundesbank President Joachim Nagel has warned that central banks must not respond to the current high inflation rates with too little, too late. “If monetary policy falls behind the curve, even stronger hikes in interest rates could become necessary to get inflation under control,” he said at the Joint Spring Conference co-hosted by the Bundesbank and the Banque de France in Eltville am Rhein. “This would create much higher economic costs,” he cautioned. 

Dr Nagel explained that the inflation expectations of households and firms in Germany are somewhat less anchored than they were a year ago, which is worrying. “We need to give households and firms clear and timely signals that we are determined to ensure price stability. Such signals contribute to lower inflation expectations and help bring inflation back to target,” the Bundesbank President said. The Joint Spring Conference focused on monetary policy and the expectations of households and enterprises.

Households and enterprises expecting higher inflation

Every month since April 2020, the Bundesbank has been surveying households in Germany regarding their expectations for inflation and other economic variables; since July 2021, monthly data on firms’ expectations have been collected as well. Between 2,000 and 5,000 individuals and about 3,000 firms now participate in these online panels every month. Survey data from May 2022 reveal that households in Germany are expecting inflation to average 5.3% for the next five years. Their expectations thus exceed 5% for the second month in a row, Dr Nagel told the audience, noting that, when the pandemic began, these expectations were still somewhat below 4%. The Bundesbank President pointed out that firms, too, have increased their medium-term inflation expectations, which, according to survey data from May 2022, stand at 4.7% on average for the next five years. Dr Nagel said that, in his view, the evidence gathered from the Bundesbank Online Panels suggests that risks to price stability exist.

Nagel: Ensure that elevated inflation does not become entrenched

Dr Nagel also used his speech to touch upon the ECB Governing Council’s latest monetary policy decisions. The Governing Council decided at its meeting on 9 June to end the net asset purchases under the asset purchase programme (APP) as of 1 July. It also announced its intention to raise the key interest rates in the euro area by 25 basis points in July. A further interest rate step is expected to follow in September, though the magnitude of this rate hike will depend on the updated medium-term inflation outlook, the Bundesbank President explained. “If inflation prospects persist or deteriorate further, a higher increase will be appropriate,” he added. “As members of the ECB Governing Council, we must ensure that elevated inflation does not become entrenched in the medium run.”

Villeroy: We need to listen more and respond with determination

Banque de France Governor François Villeroy de Galhau also spoke at the conference. Central banks, he said, need to listen more and respond with determination. Alongside economic models, surveys of households and firms play an important role in this regard because they illuminate how these agents form their expectations – such as about the path of inflation.

Mr Villeroy de Galhau emphasised that the Governing Council’s commitment to bring inflation back to the 2% target in the medium term is loud and clear. Like Dr Nagel, he stressed that the further monetary policy decisions will depend on how the economic data evolve. “Our measures will be well-explained and anchored in the expectations of firms and households,” the Banque de France Governor announced.