Joachim Nagel, President of the Bundesbank, is strongly advocating for an interest rate increase within the next four weeks. Speaking to “Handelsblatt”, he stated that the high energy prices cannot be ignored, noting that rate hikes are becoming increasingly probable if the inflation picture does not fundamentally change.
Nagel expressed concern regarding rising inflation expectations. He warned that even if the war ended soon, the inflation rate could remain significantly elevated for much longer than previously anticipated. Key contributing factors he cited include destroyed refining capacities, depleted inventories, disrupted supply chains, and the likely continuation of heightened geopolitical uncertainty.
While acknowledging the resistance from economists who point to weak economic recovery-arguing that nobody likes raising rates when growth is strained-Nagel stressed that the primary mandate of the ECB is price stability. He maintained that, in the long run, it is better for everyone if it is clear that the central bank takes its inflation target seriously and manages the rate to keep inflation near two percent over the medium term.
According to Nagel, the Eurozone is shifting toward the “negative scenario” described by the ECB in mid-March. He added that market expectations are already based on the premise of two rate hikes, since the base scenario conveyed by the markets in March factored in those increases.
