Bundesbank President Joachim Nagel, speaking at an event for the International Club of Frankfurt Economic Journalists (ICFW), has doubled down on his calls to set about downsizing the Eurosystem’s large stocks of bonds – and thus shrinking the balance sheet – in the near future. “I can imagine no longer replacing maturing APP assets as from the beginning of next year,” he said, in a reference to the 15 December meeting of the Governing Council of the European Central Bank (ECB).

That Governing Council meeting is also likely to decide on a further increase in key ECB interest rates, Mr Nagel added. “We have led the way and in December we shall move ahead robustly,” Mr Nagel told the ICFW members, remarking that, for him, 50 basis points constituted just as much of a “strong step” as 75 basis points. He did, however, first want to see what the data looked like in December.

Inflationary pressures remain high

To underpin his monetary policy assessment, President Nagel cautioned that inflation in Germany and in the euro area as a whole would be high not only this year, but that it would remain high in the coming years as well. In October, inflation as measured by the Harmonised Index of Consumer Prices (HICP) came to 11.6% in Germany and 10.6% in the euro area as a whole. It is likely, Mr Nagel remarked, that inflation will come in “well above 8%” on an annual average for 2022. The inflation picture is unlikely to improve significantly in 2023, he added, and he also sees a high degree of uncertainty for 2024.

Given the tensions in energy markets, the high inflation may prove to be more stubborn than expected. “That’s why we need to be a little more stubborn still,” Mr Nagel said about future monetary policy. The ECB staff’s new macroeconomic projections in December will also be crucial for deciding which further monetary policy measures are necessary.

Economy won’t suffer a “hard landing”

Mr Nagel also rejected claims that the rising interest rates risked worsening the economic weakness in the euro area. “I do not see the hard landing that many fear.” Rather, he is expecting a mild recession followed by weak growth in 2023, and reiterated that the current monetary policy measures were needed to prevent excessively high inflation expectations from becoming entrenched.