[1/3] This illustration, taken on 17 July 2022, shows euro banknotes. REUTERS/Dado Ruvic/Illustration
FRANKFURT, June 5 (Reuters) – The European Central Bank needs several more rate hikes to curb inflation and rates are not certain to peak this summer, Bundesbank president Joachim Nagel said on Monday.
The ECB has hiked rates at its fastest rate ever in the past year, after inflation rose by double digits last fall. Many policymakers argue that monetary tightening is in its final phase as interest rates approach.
Nagel’s comments are among the most aggressive across the 26-member Governing Council and cast doubt on market bets that deposit rates will peak at 3.75% in July and fall next year.
“From today’s perspective, several rate hikes are still needed,” Nagel said in a speech. “For me it is not certain that we will reach the interest rate peak in the summer.”
A June 15 rate hike is considered a foregone conclusion, while many policymakers have also said a July move is likely, but few have dared to discuss the post-summer recess outlook.
The problem is that underlying inflation appears to be stubbornly high, fueled by rapid wage growth and strong demand for services, suggesting that it may be difficult to get price growth back to 2% by 2025.
Although core inflation, which filters out volatile food and fuel prices, fell more than expected in May, Nagel did not see this as a significant change.
“Underlying price pressures are also way too high and show little sign of abating so far,” he said. “We need to be even tougher than current inflation.”
Once rates peak, they will have to remain stable until it is “beyond doubt” that price growth will fall back to the ECB’s target of 2% in the “near future”, Nagel added.
Nagel said he was cautiously optimistic about growth in Germany, the eurozone’s largest economy, despite a recession at the start of the year.
But several issues still threaten Germany’s competitiveness and require attention, Nagel argued.
The large global footprint of Germany’s sprawling industrial sector keeps it exposed to trade tensions, while high energy costs and a shrinking domestic labor market weaken the outlook, Nagel said.
It makes economic sense for companies to renew their supply chains, also because of political risks, but government restrictions on trade tend to reduce welfare levels, so such measures should be reserved for exceptional circumstances.
Germany also needs to expand its workforce, but higher participation will not offset the natural decline in the workforce and more skilled immigrants may be needed, Nagel added.
Reporting by Balazs Koranyi; Edited by Bernadette Baum