The European Central Bank can get inflation under control without causing severe damage to the economy, according to Governing Council member Joachim Nagel.
(Bloomberg) — The European Central Bank can get inflation under control without causing severe damage to the economy, according to Governing Council member Joachim Nagel.
Policymakers, who’re in the midst of an historic bout of interest-rate increases, are having to act “relatively quickly” to keep price expectations in check, the Bundesbank president said Monday.
“I’m convinced that we can manage it in a way that the economy weakens a bit, but that there won’t be a hard landing and high unemployment,” he said in Erfurt in the German state of Thuringia.
The ECB is all but guaranteed to raise its deposit rate by 25 basis points again on July 27. The question is whether that will mark the end of its campaign or whether another such move will come at the following meeting, in September.
Nagel is among ECB policymakers who’ve said underlying price pressures, excluding things like food and energy costs, must show clear signs of abating before monetary tightening can be paused. But some of his colleagues fret about the 20-nation euro-zone economy, which suffered a mild recession in the winter.
Portugal’s Mario Centeno said core inflation will recede, just a little slower than the headline gauge. Bank of France head Francois Villeroy de Galhau has said it’s possible to achieve a so-called soft landing, but some pain is to be expected along the way.
A big fear is that borrowing costs were lifted so rapidly that the effect is still filtering through. One of the quickest channels is bank lending rates, whose ascent has pushed real estate prices down.
When rates were low, “there were price developments that didn’t look very healthy,” Nagel said. What we’re seeing now is “what’s economically more realistic.”
Once interest rates reach their peak — which investors and economists predict will be 3.75% or 4% — they’ll be held there for some time, he reiterated, saying the ECB will reach its “cruising altitude” soon.
It’s “much better” to get inflation under control quickly “than letting it run for too long,” Nagel said. “If you allow inflation happen for too long, it’s very hard to get rid of it.”
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.