European Central Bank Governing Council member Joachim Nagel said investors are getting a better understanding of the challenge in returning inflation to the 2% target.
(Bloomberg) — European Central Bank Governing Council member Joachim Nagel said investors are getting a better understanding of the challenge in returning inflation to the 2% target.
While declining to speculate on how high the ECB will raise rates, the Bundesbank president told Bloomberg Television investors have at times had too sanguine a view of what’s needed to tackle the euro era’s worst-ever spike in prices.
“Often markets have the tendency to overshoot to a certain extent, there was maybe this overoptimism,” Nagel said. “I believe now that the markets they really got the message. I’m much more comfortable now how the markets see our role.”
With a half-point rate increase all but guaranteed in March, investors’ focus is on how high the ECB will push and long it will take. Surprisingly hot inflation numbers this week from France and Spain have prompted markets to price a more prolonged monetary-tightening cycle that sends the deposit rate to a 4% peak, up from 2.5% currently.
Bank of France Francois Villeroy de Galhau told lawmakers Wednesday in Paris that the so-called terminal rate should be reached by September at the latest. Speaking earlier the day in Frankfurt, Nagel declined to speculate on when the cycle of hikes will conclude, saying only that more “significant” moves may be necessary.
The Bundesbank president also called for the pace of balance-sheet reduction to be stepped up in the second half of the year. Bond holdings will shrink by an average €15 billion a month through the end of June.
“The market will understand why this is necessary,” Nagel said. From July, the pace could be stepped up to €20 billion, he said, calling the issue “of utmost importance.”
“Later on, maybe next year, we can talk about the PEPP,” Nagel added, referring to a €1.7 trillion-euro portfolio of assets accrued during the pandemic, under which reinvestments are currently scheduled to continue through end-2024.
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