The European Central Bank may still have to raise interest rates significantly after March as inflation, particularly core price growth, remains too high, Bundesbank President Joachim Nagel said on Friday.
Although headline inflation is well below its peak, core price growth, a key indicator of inflation’s durability, rose to an all-time high of 5.3% last month, raising the risk that price growth will stagnate above the ECB’s 2% target.
“It looks like core inflation will remain at very high levels beyond March and will only slow down,” Nagel told a news conference in the Indian city of Bengaluru on the sidelines of a G20 financial meeting.
“That is why I do not rule out the need for further interest rate hikes, significant interest rate hikes, beyond March.”
The ECB has already promised to raise rates in March by 50 basis points to 3%, and markets now expect it to raise them another 75 basis points before the end of the summer.
However, monetary policymakers, particularly those in the 20 southern eurozone countries, oppose it and call for more dovish measures, arguing that rates are constraining economic growth.
Nagel disputed this argument, saying he did not believe rates were restrictive yet, despite the steepest monetary tightening cycle in the ECB’s history.
The decision on what level of interest rates is neutral, i.e. neither stimulating nor slowing growth, is purely subjective, and although most monetary leaders in the past placed it between 1% and 2%, many now claim that the performance of the economy suggests that it is actually higher.
Nagel said halting monetary tightening too soon would be a “blunder,” an approach echoed by other conservative monetary leaders, who say the risk of indoing enough to combat inflation outweighs the cost of excessive intervention.