The European Central Bank is fighting record inflation with sharp interest rate hikes. But inflation is persistent, so interest rates are likely to continue to rise.
Despite an imminent economic downturn, the euro currency watchdogs are heading for further interest rate hikes. “Further interest rate hikes are needed to bring the inflation rate back to two percent,” said Bundesbank President Joachim Nagel at a central bank symposium in Frankfurt. Nagel did not want to commit himself to the amount of further increases: “All I know is that large interest rate hikes are necessary.”
European Central Bank (ECB) Vice-President Luis de Guindos told Politico in an interview: “We will continue to raise interest rates to a level that ensures inflation comes back in line with our definition of price stability. ” De Guindos emphasized: “If we want to improve growth prospects, it is very important to fight inflation.”
Inflation rate in Germany at 10.4 percent
The ECB is aiming for price stability in the euro area in the medium term with an inflation rate of two percent. Above all, the increase in energy and food prices has been fueling inflation for months. In the euro zone, consumer prices in October were 10.7 percent higher than in the same month last year. In Germany, the inflation rate rose to 10.4 percent in October.
Nagel warned that the longer inflation remains high, the more difficult it will be for monetary policy to restore price stability. This would increase the risk that inflation would solidify at a high level in the medium term. “I will therefore continue to work to ensure that we as the Governing Council do not let up too early, that we continue to stubbornly push ahead with monetary policy normalization – even if our measures dampen economic development,” stressed Nagel, who has a say in monetary policy in the Governing Council .
“Inflation is a stubborn phenomenon. If that’s the case, then we have to be a bit more stubborn in monetary policy,” said the Bundesbank President. Otherwise there is a risk of significantly higher overall economic costs.
Inflation rate likely to remain high
Both Nagel and de Guindos expect inflation to remain elevated for some time to come. “The inflation rate in Germany is likely to remain high in the coming year. I think it’s likely that there will be a seven before the decimal point on average in 2023,” predicted Nagel.
ECB Vice President de Guindos expects euro area inflation to fall in the first half of next year, “but on average headline and core inflation will remain very high,” de Guindos said.
challenge for the banks
For banks, the mixture of an economy slipping into recession and rapidly rising interest rates is a challenge. “Financial stability has deteriorated significantly over the past six months due to the slower growth and high inflation economic outlook and tightening financial conditions,” de Guindos summarized. However, banks are also much more resilient today than they were ten years ago.
The Bundesbank board member responsible for banking supervision, Joachim Wuermeling, takes a similar view: “Thanks to a comfortable capital cushion, the German banks are overall quite stable.” Loan defaults have so far been the exception, the ratio of non-performing loans in the balance sheets of German banks is still low.
“But that cannot simply be carried forward into the future,” warned Wuermeling. risks would have increased. “Nevertheless, as of today, I am assuming that we will not see a credit crunch or even a general banking crisis in the coming year,” confirmed Wuermeling.
The head of ECB banking supervision, Andrea Enria, warned the financial institutions in the euro area not to underestimate the risks of the interest rate turnaround. The exit from the negative interest rate policy and the normalization of the interest rate environment are undeniably “good news for the profitability of the banks,” said Enria at the Bundesbank symposium. However, banks must “pay due attention to the measurement, monitoring and active management of interest rate risk”.