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Global Economy

Nagel for ECB reaction to high inflation

The new President of the Bundesbank, Joachim Nagel, has campaigned for the European Central Bank to raise interest rates this year. "From today's perspective, the experts at the Bundesbank consider it likely that inflation will be well over four percent on average in Germany in 2022," said Nagel in an interview with the weekly newspaper "Die Zeit". "If the picture does not change by March, I will advocate normalizing monetary policy," added Nagel. "The first step is to end net asset purchases during 2022. Then rates could rise later this year."

Last year, the rate of inflation was 3.1 percent, mainly due to the sharp rise in energy prices in Germany. According to initial estimates, in January it was 4.9 percent compared to the same month last year.

Don't wait too long

Against this background, Nagel warned against waiting too long to normalize monetary policy: "In my opinion, the economic costs are significantly higher if we act too late than if we act early." This has also been shown by past experience. "Later we would have to raise interest rates more vigorously and at a faster rate," he explained. The financial markets then reacted with more volatility. "If we wait too long and then have to act more massively, market volatility may be greater."

One of 21

Nagel, who succeeded Jens Weidmann as Bundesbank President in January, is just one of 21 voting members of the ECB's Monetary Policy Council. In every fifth month, the head of the Bundesbank is not entitled to vote at all. This is not entirely irrelevant, since the members of the Council do not necessarily always take the same line.

In January, inflation in the euro area shot up to 5.1 percent, the highest level since statistics began in 1997. The central bank is aiming for an annual inflation rate of two percent in the euro area and is at least temporarily willing to accept a different development.

The euro benefits somewhat

The euro benefited from Nagel's statements and then rose to 1.1446 US dollars. The central banker's statements were interpreted as positive for the common currency, since the probability has now increased that the interest rate differential between the USA and the euro area will not widen further.

Six interest rate hikes are now expected in the USA in the current year – probably starting in March. The so-called "Fed Watch Tool" of the US futures exchange CME shows that in December the key interest rate will most likely be in a range of 1.5 to 1.75 percent. In order to reach this interest rate level, the Fed would have to raise interest rates six times this year – calculated from the current key interest rate level of 0.00 to 0.25 percent.

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