Bundesbank President Joachim Nagel has once again advocated making a timely start on normalising policy rates in the euro area. “When net asset purchases come to an end – possibly in June – I see the time for an initial interest rate hike soon afterwards – possibly in July – as having come,” Mr Nagel said at the press conference for the G7 meeting of finance ministers and central bank governors at the Petersberg, near Bonn. He added that they could soon be followed by further interest rate moves.

Fighting inflation

Energy prices, in particular, have surged, but consumer prices in the industrial countries have also risen significantly across the board, Mr Nagel told the audience. The Bundesbank’s business survey shows that most firms in Germany are planning to raise their prices further over the next few months, he explained. “Central banks need to ensure that the very strong inflationary pressures do not become entrenched. We must therefore take decisive action.”

Ensuring sound public finances

Mr Nagel also admonished governments – especially those in the euro area – to increase fiscal discipline. “Although fiscal policy intervention was appropriate during the pandemic and the war in Ukraine, new borrowing should be scaled back as soon as possible in order to pave the way for a sustainable debt path,” he remarked. “I believe that, in turn, credible fiscal rules will play an important role here. It will be crucial to preserve fundamental confidence in sound public finances so that fiscal policy retains agency and our single monetary policy can focus on ensuring price stability.”

High inflation not limited to euro area

In the subsequent Q&A session, Mr Nagel stressed that high inflation was not only an issue for the euro area. Countries such as the United States or the United Kingdom were experiencing even higher inflation and had therefore initiated an interest rate reversal at an earlier stage, he explained. He expressed confidence that the Eurosystem would soon follow suit, however. Federal Finance Minister Christian Lindner likewise emphasised that high inflation was a serious issue that would need to be addressed through international efforts. “We must pull in the same direction through international cooperation. We must also find a way to exit accommodative fiscal policy,” he said.

Preparation for the G7 summit at Schloss Elmau

The two-day meeting of the finance ministers and central bank governors of the seven leading industrial economies (G7) focused on the topic of inflation and, above all, on liquidity support for Ukraine. Possible further sanctions against Russia and international taxation were also discussed at the meeting, which is intended to prepare the ground for the G7 summit of heads of state or government taking place at Schloss Elmau from 26 to 28 June this year.