Joachim Nagel, President of the Bundesbank, has strongly argued for an interest rate increase within the next four weeks. According to Nagel speaking to the “Handelsblatt”, high energy prices cannot be ignored in current monetary policy considerations, and he stated that interest rate hikes are increasingly probable if the inflation outlook does not fundamentally change.
Nagel pointed to rising inflation expectations, noting that even if a war were to end soon, the rate of inflation could remain significantly elevated for a longer period than previously anticipated. He attributed these persistent pressures to destroyed refining capacity, falling inventories, disrupted supply chains, and continued geopolitical uncertainty.
While recognizing the economic headwinds, Nagel defended his call for higher rates against objections raised by some economists concerned about slow growth. However, he reminded listeners that the European Central Bank’s (ECB) mandate is price stability. He argued that, in the long run, it is best for all parties if the central bank demonstrates a serious commitment to its inflation target, keeping rates near two percent in the medium term.
Nagel further reported that the Eurozone’s current trajectory is moving toward the ECB’s “worst-case scenario” outlined in mid-March. He added that market expectations already priced in two rate increases even within the ECB’s baseline scenario this past March.