ECB rate hikes not necessarily over, Nagel says

November 29, 2023

The European Central Bank may need to raise interest rates again if the inflation outlook worsens, and the bank should not rush to ease policy too quickly after the steepest set of rates hikes on record, Bundesbank chief Joachim Nagel said today.

The ECB has signalled steady rates for several quarters ahead and investors are now pricing in early 2024 cuts, prompting conservatives like Nagel to push back on those bets, even if the inflation outlook was “encouraging”.

“That does not necessarily mean that the current hike cycle is now over,” Nagel, an influential voice on the ECB’s rate-setting Governing Council, said in a speech in Cyprus. “Of course, it could be that, if the inflation outlook worsened, we might have to raise rates again.”

A downside surprise, that price growth would return to the ECB’s 2% target quicker than forecast, was “much less probable,” so it was premature to even speculate about rate cuts, Nagel said.

Markets now see about 95 basis points of cuts next year, with the first move expected as soon as April, a timeline a host of policymakers have challenged.

A key part of market bets is that economic growth now looks especially weak and the bloc is likely in a shallow recession already, as the labour market and services, key planks in past growth, have started to soften.

But Nagel said that growth will rebound next year, wage growth is still robust and the disinflationary effect of falling energy prices has dissipated.

Instead of loosening policy, Nagel actually made the case for further tightening via a “significantly” smaller balance sheet.

Policy easing should only come when inflation is undoubtedly heading back to 2% and even then, it would be better to err by acting too late than too early, he said.

“I would prefer to err on the side of caution and ensure a timely return to price stability,” he added.

The ECB has signalled steady rates for several quarters ahead and investors are now pricing in early 2024 cuts, prompting conservatives like Nagel to push back on those bets, even if the inflation outlook was “encouraging”.

“That does not necessarily mean that the current hike cycle is now over,” Nagel, an influential voice on the ECB’s rate-setting Governing Council, said in a speech in Cyprus. “Of course, it could be that, if the inflation outlook worsened, we might have to raise rates again.”

A downside surprise, that price growth would return to the ECB’s 2% target quicker than forecast, was “much less probable,” so it was premature to even speculate about rate cuts, Nagel said.

Markets now see about 95 basis points of cuts next year, with the first move expected as soon as April, a timeline a host of policymakers have challenged.

A key part of market bets is that economic growth now looks especially weak and the bloc is likely in a shallow recession already, as the labour market and services, key planks in past growth, have started to soften.

But Nagel said that growth will rebound next year, wage growth is still robust and the disinflationary effect of falling energy prices has dissipated.

Instead of loosening policy, Nagel actually made the case for further tightening via a “significantly” smaller balance sheet.

Policy easing should only come when inflation is undoubtedly heading back to 2% and even then, it would be better to err by acting too late than too early, he said.

“I would prefer to err on the side of caution and ensure a timely return to price stability,” he added.

Article Source – ECB rate hikes not necessarily over, Nagel says – RTE

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