The European Central Bank’s historic series of interest-rate increases isn’t finished yet as upside risks to the inflation outlook predominate, Governing Council member Joachim Nagel said.
While decisions beyond a planned hike this month remain data-dependent, “the way I see it, we still have some way to go,” Nagel, who is president of Germany’s Bundesbank, said in a speech in Frankfurt on Monday.
“Upside risks to the price outlook dominate,” he said. “Looking at the forecast, higher rather than lower inflation rates are to be expected. For example, stronger-than-expected wage increases or profit margins could cause inflation to accelerate over the medium term.”
With another interest-rate increase on July 27 all but assured, ECB officials are trying to determine how far borrowing costs must rise thereafter to get inflation under control. Nagel has been vocal about the need for further tightening.
Underlying inflation in the euro area quickened again in June, a setback for policy makers who arere watching for signs that the 400 basis points of rate hikes enacted so far are starting to bite. While there’s growing evidence that the measures are putting a brake on manufacturing activity, demand for services has remained robust.
Nagel also said the ECB’s balance sheet should shrink “significantly” in the coming years.
“Monetary policy challenges in the future could require that more room for maneuver is available again,” Nagel said. “There’s a lot to be said for the central bank’s footprint on the market becoming much more manageable in the future. In particular, this would mean a significantly smaller balance sheet.”
--With assistance from Sonja Wind and Nicholas Comfort.
