Recession fears shouldn’t delay rate hikes, ECB’s Nagel says
EUROPEAN Central Bank (ECB) Governing Council member Joachim Nagel said concerns over an economic contraction in the euro area shouldn’t derail increases in borrowing costs to counter record inflation.
“We shouldn’t delay the next interest-rate steps for fear of a potential recession,” Nagel, who heads Germany’s Bundesbank, said on Tuesday (Aug 30) in a speech. Empirical data showed that a so-called front-loading of hikes even minimises the risk of a “painful” economic downturn, he said.
The comments feed into an intensifying debate over how much the ECB will raise rates at its meeting next week. With euro-area inflation already at a record 8.9 per cent and still accelerating, markets are split on whether policymakers will implement a 50 or 75 basis-point hike.
Greek central bank governor Yannis Stournaras said the euro area was caught in a “perfect inflation storm which is mostly supply-side driven”, and described it as a “hydra multi-headed monster”. But, speaking at the European Forum in Alpach, Austria, he also noted that economic risks have created a “dilemma” for officials.
Other policymakers have also urged restraint in tightening because of recession fears. Executive board member Fabio Panetta has said a slowdown would ease inflationary pressures, while chief economist Philip Lane said this week that a “steady pace” of increases poses a lower risk of disruption than bigger hikes.
While most of the euro-area inflation spike is being driven by energy, there’s worry that it may spill over into other areas and become more entrenched. Nagel said he supported last month’s decision to hike by 50 basis points because a larger step minimises the risk that expectations for future price growth get out of control.
“The longer inflation remains elevated, the higher the risk that inflation dynamics and medium-term inflation expectations become entrenched at an elevated level as well,” he said. “To avoid a de-anchoring of inflation expectations, the Eurosystem shouldn’t leave any room for doubt about its determination to fight inflation.”
He also said it’s unclear, for now, how high rates will ultimately have to rise.
Earlier on Tuesday, Dutch official Klaas Knot earlier Tuesday called for a “swift” normalisation of monetary policy, while Slovenian central bank chief Bostjan Vasle said he may back a move beyond July’s half-point step. Madis Muller of Estonia said price stability has to be the ECB’s main concern. He wants 75 basis points to be among the options at next week’s meeting, according to an interview with Reuters published on Tuesday. BLOOMBERG
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