Bundesbank President Joachim Nagel said the European Central Bank is near peak for its borrowing costs, though another bout of inflation may require more tightening.
“I do believe we are close to that level we see as the terminal rate,” Germany’s top monetary policy official told students in Milan on Wednesday. “I think rates will stay where they are for a while.”
A record run of ECB interest-rate aggression has led most observers to predict policymakers won’t raise borrowing costs again. Officials stayed on hold in October and President Christine Lagarde said earlier this month a reduction won’t happen in the “next couple of quarters.”
Markets aren’t convinced, betting on a rate cut as soon as April, a notion hawkish Governing Council members like Nagel have rejected.
“There are still some risk factors that could trigger another inflation round,” he said. “So nobody knows” what’s next.
The ECB’s rate moves have raised the prospect that the euro-area economy might be damaged more severely, with Vice President Luis de Guindos telling Bloomberg Television earlier Wednesday that investor expectations of a so-called soft landing might be “wishful thinking.”
Nagel is more upbeat, saying he’s not concerned that the euro area might be “entering into a situation where we are creating a hard landing — most of the slowdown of the economy has taken place.”
Asked about the European Union’s fiscal rules, Nagel said he backs an overhaul.
“I believe this is the understanding everywhere in Berlin and Brussels etc that we have to find a framework that is robust but works for everyone,” he said. “It should be a level playing field for every country to get to rules that bring fiscal debts into line.”
The Bundesbanker predicted that despite a standoff in Brussels, finance ministers will find a compromise.
“We learned 15 years ago how complicated the situation can get when financial markets are not confident,” he said. “We have to find a framework which is robust but works also for everyone in the way that the old framework worked for 25 years.”
