Joachim Nagel

Nagel: Inflation must not be allowed to become entrenched

In a speech delivered in Hanover, Bundesbank President Joachim Nagel spoke about the impact of the war against Ukraine on the economic situation in Germany and the euro area. In his remarks, he addressed the ECB’s downward corrections to the projections for euro area growth, noting that soaring energy prices, disruptions to trade and considerable uncertainty had darkened the economic outlook. The ECB currently projects that the euro area economy will grow by only 3.7% in 2022. In the most severe scenario, economic growth could even be 1.4 percentage points lower. “Hence, there are significant downside risks to economic activity at present,” according to Mr Nagel, speaking at a ceremony to mark the change of office of the President of the Regional Office in Bremen, Lower Saxony and Saxony-Anhalt.

Consumer prices likely to continue rising

For some months now, the inflation rate has been pointing back upwards significantly. “The inflation rate was very high even before the war against Ukraine. [...] Given the surge in energy prices on account of the war, consumer price inflation is likely to pick up again substantially, particularly in the near term,” Mr Nagel said. The ECB Governing Council, he continued, now needed to ensure that the strong inflation did not become entrenched and did not lead to excessively high inflation in the medium term.

Possible to exit accommodative monetary policy

In his speech, Mr Nagel warned about “second-round effects” regarding inflation. To wit, the low unemployment rate and the growing shortage of skilled labour could strengthen wage dynamics. However, second-round effects could also be created if the current wave of inflation pushes up inflation expectations and these rise more strongly the longer the high inflation persists. Central banks must therefore remain very vigilant against upside risks to price stability over the medium term, Mr Nagel said. In the current environment, he continued, there was even more reason than before to keep all options on the table with regard to the monetary policy stance so that the ECB Governing Council could also respond quickly if necessary. To Mr Nagel, however, another thing was also clear: “If the price outlook requires it, we will need to further normalise monetary policy and also begin to hike our policy rates.” Should the net purchases end in the third quarter of 2022 as currently planned, in his view, this would provide the opportunity of raising policy rates this year if needed. “Exercising due caution given the exceptional degree of uncertainty, we should not drag out the exit from the very accommodative monetary policy,” according to Mr Nagel. “Otherwise, interest rates would have to increase later on all the more quickly and by more.

New President of the Bundesbank's Regional Office in Bremen, Lower Saxony and Saxony-Anhalt

At the change of office ceremony in Hanover, Mr Nagel welcomed Corina Paetsch, the incoming President of the Bundesbank’s Regional Office in Bremen, Lower Saxony and Saxony-Anhalt. Ms Paetsch, formerly Head of In-house and Branch Operations at the Regional Office in Hesse, will succeed Stephan Freiherr von Stenglin, who will retire at the end of March. “You have been one of the voices of the Bundesbank’s clear stability policy stance in Germany and abroad for 36 years now,” Bundesbank President Joachim Nagel said to Mr von Stenglin. At the same time Mr von Stenglin, an economist by training, had enthusiastically contributed to creating the confidence and trust that are so important for a central bank’s work.