Bundesbank President Joachim Nagel has called on the Governing Council of the ECB to send out a clear message in June about where euro area monetary policy is heading. He stressed that the decision would then have to be communicated in crystal-clear fashion. His view today is that the Governing Council will have to take a first interest rate step in July, followed by more in the second half of the year. “Negative interest rates will soon be a thing of the past,” Dr Nagel stated in an interview with the news magazine “DER SPIEGEL”. “I welcome the fact that we will soon be raising the key interest rates and acting decisively to combat inflation.”

According to the Bundesbank President, the Bank is expecting the inflation rate to average around 7% in Germany in 2022. “From next year onwards, inflation is likely to edge back down gradually.” Dr Nagel warned that inflationary pressures will remain high for the time being if more supply chains break down and energy prices continue to rise. But he pointed out that central banks have the tools to reduce inflationary pressures and push prices back down to target in the medium term: “We can do it, and we will do it,” he asserted.

Learn from misjudgements

The Bundesbank President rebuffed criticism that the ECB has underestimated the pace of price inflation, explaining that the scale of the rise in inflation was something that could not have been predicted and took most forecasters by surprise. He remarked that some observers did point to the upside risks to inflation and gave a reminder that forecasting is extremely difficult in times of high uncertainty especially. “However, we must, of course, learn from our misjudgements and take account of the new circumstances,” Dr Nagel affirmed.

Scale back large bond holdings

The President of the Bundesbank also commented on the high stocks of government bonds held by the Eurosystem central banks, saying that what matters first of all is that the stocks do not increase any further. “You have to take your foot off the accelerator before you apply the brake,” Dr Nagel added. “But there is no question that, at the end of the day, the Eurosystem will have to scale back its very large bond holdings. That is part of the normalisation of monetary policy.”

Dr Nagel currently considers the risk of a wage-price spiral against the backdrop of high inflation to be manageable if the Eurosystem keeps inflation expectations firmly anchored at 2%. The Bundesbank is monitoring developments closely and, while Dr Nagel anticipates that the future will see wages increasing more significantly in the euro area, he sees “no signs at present that things are getting out of control”. He also pointed out that a wage-price spiral depends not just on wages, but on how enterprises set their prices as well.