FRANKFURT/LONDON (Reuters) – The European Central Bank will need to raise interest rates further if inflation develops along the path it forecast last week, especially since risks are skewed towards even higher readings, Bundesbank President Joachim Nagel said on Wednesday.
The ECB last week raised rates by 50 basis points to 3% but provided no guidance on future moves as turbulence in the banking industry clouded the outlook and risked morphing into a broader crisis that could then weigh on the real economy.
Nagel, an influential conservative voice on the ECB’s 26-member Governing Council, said that banks did well in coping and the sector was resilient with strong buffers, so the risk of contagion is low.
“If inflation develops as projected, further interest rate hikes have to follow in upcoming meetings,” Nagel said in London. “We have to tame inflation, and to do so, we have to be bold and decisive. In my view, our job is not done yet.”
Markets only weeks ago expected the ECB to lift rates by another 100 basis points in the coming months but the bank rout, induced by the collapse of Silicon Valley Bank and the troubles of Credit Suisse overwrote these bets.
Investors now see only about 55 basis points of hikes, with the next move due in May, a pricing that is still up from Monday when they bet that the ECB was done and the next step would be a rate cut.
“In the event that financial market tensions continue or spread to the euro area, we are prepared to respond to preserve financial stability in the euro area,” Nagel said.
But rate hikes need to keep going up because inflation will remain too high in the near term and underlying price growth is proving to be stubborn.
“The projection still contains significant uncertainty, and in particular upside risks,” Nagel said. “Wages may increase even more strongly than assumed in the projections.
(Reporting by Balazs Koranyi and Marc Jones; Editing by Alison Williams)
