The European Central Bank may have to continue lifting borrowing costs after the summer to contain inflation, according to Bundesbank President Joachim Nagel.
(Bloomberg) — The European Central Bank may have to continue lifting borrowing costs after the summer to contain inflation, according to Bundesbank President Joachim Nagel.
“As I see it, we still have more ground to cover,” Nagel said Friday in a speech. “We may need to keep raising rates after the summer break.”
The ECB increased its deposit rate by a quarter-point to 3.5% on Thursday, as expected, with President Christine Lagarde describing another move in July as “very likely.” But the focus is on the meeting after that, in September, about which she was tight-lipped.
While analysts had been expecting the ECB’s unprecedented tightening campaign to end after next month’s increase, markets are now almost fully pricing another hike after that — boosted by a slight upward revision in quarterly inflation projections.
While price gains have been moderating, Lagarde said the outlook for inflation — and the 20-nation euro-zone economy, which fell into a recession over the winter — remains “highly uncertain.”
“Once we have reached the peak, we will stay there until we are sure of a safe and timely return of inflation to our 2% target,” Nagel said. “We have to support this interest-rate policy by reducing our balance sheet. I very much welcome the decisions to increase the pace of this reduction.”
Economists including those at Goldman Sachs are shifting their rate predictions upwards. Goldman now sees the deposit rate reaching 4% as the stronger inflation projections presented this week “point to a higher hurdle to finish the hiking cycle in July.”
Speaking earlier Friday, Slovenian central bank chief Bostjan Vasle also said a September rate hike is possible, should consumer-price gains not abate sufficiently.
“If it turns out that inflation is more persistent than it seems at the moment, if the other actors on the market react in ways that will contribute to further price growth — I’m thinking mainly of those who set prices — as well as conditions that will prevail in terms of wage growth, then of course further monetary-policy action will be necessary,” he said.
–With assistance from James Hirai.
(Updates with Slovenian central bank chief in last two paragraphs.)
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