FRANKFURT (Reuters) -The European Central Bank could raise interest rates this year as high inflation is proving more persistent than once thought, Bundesbank President Joachim Nagel told German newspaper Die Zeit on Wednesday.
The ECB last week walked back on a pledge not to raise rates in 2022 but has also attempted to temper expectations after markets quickly priced in two moves that would bring its deposit rate back to zero in December.
Maintaining the Bundesbank’s historically conservative line, Nagel, who took charge of the German central bank in January, said in an interview that acting too late in normalizing policy could be especially costly.
“If the (inflation) picture remains unchanged in March, I will be in favour of normalising monetary policy,” Nagel told Die Zeit. “The first step is to discontinue the net asset purchases over the course of 2022. Then interest rates could be raised before this year is over.”
Nagel joins Dutch central bank chief Klaas Knot in openly discussing a rate hike this year that would be the ECB’s first increase in borrowing costs since 2011.
“The economic costs are significantly higher if we act too late than they are if we act in good time,” Nagel said.
“If we act later we would have to raise interest rates more substantially and at a faster pace. Financial markets would then respond with greater volatility.”
Nagel also said that inflation in Germany, the 19-country euro zone’s biggest economy, is likely to “significantly” exceed 4% this year, more than twice the ECB’s 2% target and also well above the Bundesbank’s own projection of 3.6%.
“There are signs that the rise in energy prices could be more persistent, that it is affecting the prices of other goods and services, and that mounting demand is also behind it,” he told the newspaper.
The ECB last week warned that inflation risks were now tilted to the “upside,” suggesting that price growth could remain above target even in 2023, the third straight year.
(Reporting by Balazs Koranyi; Editing by Andrew Heavens and Catherine Evans)
