In an interview with the Financial Times, Bundesbank President Joachim Nagel called for a further increase in euro area interest rates, saying, “if we are to tame this stubborn inflation, we will have to be even more stubborn”. Our fight against inflation isn’t over yet, he noted, while stressing that interest rates are approaching restrictive territory.

The ECB Governing Council last week raised the key interest rates for the sixth time in succession, lifting the deposit facility rate from 2.5% to 3.0%. In his interview with the London-based financial newspaper, Mr Nagel emphasised that euro area inflation had to drop “significantly and sustainably” from 8.5% – more than four times the ECB’s 2% target – before the central bank could stop raising its interest rates. Core inflation, which excludes energy and food prices, would also have to “decline sufficiently” after it hit a record 5.6% last month, he said.

Bundesbank President Joachim Nagel: “We are not facing a repeat of the financial crisis we saw in 2008”

The euro area banking sector remains in good shape, Mr Nagel said, describing it as “resilient” in the interview. He conceded that the collapse of US lender Silicon Valley Bank and the rescue of Swiss bank Credit Suisse might cause European banks to become more cautious in their lending, but he stressed that “we are not facing a repeat of the financial crisis we saw in 2008”.

Mr Nagel also used the interview to push for a faster reduction in Eurosystem asset holdings. “We should do more,” he argued, adding that “at a later stage” the ECB could also consider shrinking the separate pandemic emergency purchase programme (PEPP), where asset holdings amount to €1.7 trillion. The PEPP was launched in 2020 to counter the fallout of the COVID-19 pandemic. 

In March, the Eurosystem started to shrink its asset holdings by not replacing an average of €15 billion of the securities that mature each month under the €3.2 trillion asset purchase programme (APP).

Mr Nagel maintained an optimistic outlook for the German and euro area economies, saying, “I still envision a soft landing”. He emphasised the key influence of the euro area’s “extraordinarily robust” labour market. Unemployment remains at record lows.