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ECB’s Nagel Says Interest-Rate Hike Possible by Year-End

Bundesbank’s Nagel Says ECB Could Raise Rates by Year-End

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The European Central Bank may need to raise interest rates this year if the outlook for euro-zone inflation doesn’t improve “significantly,” according to the new head of Germany’s Bundesbank.

In his first major comments since taking office at the start of 2022, 55-year-old Joachim Nagel told the Zeit newspaper that the ECB has “reached a point that’s a textbook case for central-bank action” -- signaling a significant policy shift could occur as soon as its next meeting in March.

“The ECB now needs to step up. We’ll look at the data -- new growth and inflation forecasts are coming out in March. And that will be the basis for our decisions,” Nagel said in the interview, published Wednesday. “If the inflation picture and above all the outlook hasn’t brightened significantly by then, we’ll have to recalibrate the monetary-policy stance.”

ECB’s Nagel Says Interest-Rate Hike Possible by Year-End

The remarks suggest Nagel will maintain the Bundesbank’s traditionally hawkish position. They could also further embolden investors who’ve brought forward bets on increases in rates this year. The ECB hasn’t raised them for more than a decade.

The comments chime with Nagel’s Dutch colleague on the ECB Governing Council, Klaas Knot, who said at the weekend that a hike could come as early as October.

Bank of France Governor Francois Villeroy de Galhau, however, said Tuesday that market reactions may have been “too high in recent days.”

ECB Executive Board member Isabel Schnabel said in a Q&A session on Twitter that officials needed to assess the “the strong developments in the labor market,” and that the central bank would have to respond if expectations about future price growth get out of control. 

Reinforcing a comment from President Christine Lagarde on Monday, Schnabel also said that any policy adjustment will be “data-dependent and gradual, avoiding unnecessary disruptions.”

Nagel echoed concerns voiced frequently by his predecessor, Jens Weidmann, on asset-purchase programs, saying they should be ended before rates rise because they “involve greater risks and side effects.”

“I’m very aware of the risks we’ll take if we wait too long with the normalization of monetary policy,” he said. “The economic costs are significantly higher if we act too late than they are if we act in good time.”

Nagel said inflation in Germany is likely to average significantly more than 4% this year, well above the Bundesbank’s forecast from December.

In the euro area, prices soared by a record 5.1% in January, more than double the 2% target. The worsening outlook prompted an unexpectedly hawkish tone from Lagarde following last week’s policy decision. She refused to rule out a rate hike this year.

“If the picture remains unchanged in March, I’ll be in favor of normalizing monetary policy,” Nagel said. “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.”

©2022 Bloomberg L.P.