© Reuters. FILE PHOTO: A view of the European Central Bank (ECB) headquarters in Frankfurt, Germany March 16, 2023. REUTERS/Heiko Becker
FRANKFURT/LONDON (Reuters) -The European Central Bank will need to raise interest rates further if inflation develops along the path it forecast last week and it is far too soon to talk about cutting rates, Bundesbank President Joachim Nagel said on Wednesday.
The ECB last week raised rates by 50 basis points to 3% but provided no guidance on future moves as turbulence in the banking industry clouded the outlook and risked morphing into a broader crisis that could weigh on the real economy.
Nagel, an influential conservative voice on the ECB’s 26-member Governing Council, said that banks had coped well and the sector was resilient with strong buffers, so the risk of contagion is low.
“If inflation develops as projected, further interest rate hikes have to follow in upcoming meetings,” Nagel said in London. “We have to tame inflation, and to do so, we have to be bold and decisive. In my view, our job is not done yet.”
He said talk of rate cuts in the coming year was “much, much, much too early”.
“We are approaching restrictive territory,” Nagel said, referring to a rate that curtails growth. “I do not know when we will more or less be there…but what I know is that when we are there we have to stay there and not come down too early.”
Markets only weeks ago expected the ECB to lift rates by another 100 bps in the coming months but the bank rout, triggered by the collapse of Silicon Valley Bank in the United States and the troubles at Credit Suisse, overwrote these bets.
Investors now see only about 55 bps of additional hikes, with the next move due in May, but that pricing is still up from Monday when markets bet that the ECB was done and the next step would be a rate cut within months.
“In the event that financial market tensions continue or spread to the euro area, we are prepared to respond to preserve financial stability in the euro area,” Nagel said.
But rates need to keep going up because inflation will remain too high in the near term and underlying price growth is proving to be stubborn.
“The projection still contains significant uncertainty, and in particular upside risks,” Nagel said. “Wages may increase even more strongly than assumed in the projections.