The prospects for inflation are not good: “We will have to live with inflation rates that are too high for some time, that’s a tough road ahead,” says the Bundesbank President.
According to Bundesbank President Joachim Nagel, further interest rate increases are necessary in the fight against high inflation. “Although inflation in the euro area is declining, it is still too high. And the latest forecasts suggest that we cannot expect price stability to be restored in the near future,” said Nagel on Monday at the “Frankfurt Euro Finance Summit”.
“Inflation is proving to be more stubborn than many thought. Monetary policy must now prove to be more stubborn and consistent than many had expected,” said the Bundesbank President. “We will have to live with excessively high inflation rates for some time, that’s a tough road ahead,” affirmed Nagel. “Monetary policy must remain persistent.”
After years of zero and negative interest rates, the European Central Bank (ECB) initiated a turnaround in interest rates last summer. Since July 2022, the central bank has raised interest rates in the euro area eight times in a row in the fight against high inflation. The key interest rate at which commercial banks can get fresh money from the ECB is now 4.0 percent.
Nagel: No clear downward trend in the core inflation rate
For the next interest rate decision on July 27, ECB President Christine Lagarde has promised a further increase. Nagel, who has a say in monetary policy in the Governing Council, said on Monday: “We will decide whether key interest rates need to be raised further after the July meeting, depending on future data developments. The way I see it when I look at the Looking at the data today, we still have a way to go.”
Higher interest rates make loans more expensive. This can slow down demand and counteract high inflation rates. The ECB is aiming for price stability in the euro area in the medium term with an inflation rate of two percent.
“The core inflation rate, which excludes volatile energy and food prices, does not yet show a clear downward trend,” Nagel said. “According to a flash estimate, it was 5.4 percent in June and thus slightly higher than in the previous month.” So underlying inflation is more stubborn than the decline in the headline rate suggests.
Source: Stern
