Bundesbank President Joachim Nagel, speaking against the backdrop of continued high inflation rates, has emphasised the risks the Governing Council of the European Central Bank (ECB) will take if it waits too long to begin monetary policy normalisation. “As I see it, the economic costs are significantly higher if we act too late than they are if we act in good time,” he said in an interview with the German weekly newspaper “DIE ZEIT”. “You see, if we act later we would have to raise interest rates more substantially and at a faster pace. Financial markets would then respond with greater volatility.”

Commenting on a suitable point in time for a decision, Dr Nagel pointed to the new forecasts for economic growth and inflation that the ECB staff will present at the ECB Governing Council’s monetary policy meeting in March. “If the picture remains unchanged in March, I will be in favour of normalising monetary policy.” The first step is to discontinue the net asset purchases over the course of 2022. “Then interest rates could be raised before this year is over,” said Dr Nagel. The asset purchases involve greater risks and side effects, he explained, which is why they were not adopted until late in the day and should be the first measures to be stopped again. “I think it is important that there is a consensus in the euro area to first roll back the measures we adopted last in the crisis.” Dr Joachim Nagel took over from Jens Weidmann as Bundesbank President in January.

Inflation in Germany could be significantly above 4% for 2022

In the interview, Dr Nagel expressed his concern about the current high inflation rates in Germany and in the euro area as a whole, noting that Bundesbank experts think that average inflation for 2022 in Germany could be significantly above 4%. The Bank currently expects inflation in Germany to only decline discernibly in the second half of 2022, but that it will continue to be too high. If inflation remains high for longer, he added, the probability of second-round effects materialising increases. “I am, however, convinced that monetary policy will manage to achieve its objective of 2% inflation over the medium term,” Dr Nagel said with reference to the euro area as a whole.

Energy prices above all have risen sharply. “If energy prices fluctuate strongly for only a brief time, monetary policymakers will do well to exercise restraint,” the Bundesbank President argued, though he does see signs that the rise in energy prices could be more persistent, that it is affecting the prices of other goods and services, and that it is being driven in part by mounting demand.

Increased energy prices not the sole reason for high inflation rate

Half of the current high inflation is driven by energy prices. Dr Nagel cautioned that it is worth looking at the other half as well. He cited many reasons why the inflation rate has risen significantly, including the pandemic, supply bottlenecks and the current geopolitical situation. “Now, however, there are signs that we need to change tack: many countries are starting to loosen their pandemic containment measures. The economy is recovering. Labour markets are looking good. That’s an encouraging picture. That is why monetary policy can become less accommodative.”