Despite the first signs of relaxation, inflation in the euro zone has not yet peaked, according to Bundesbank President Joachim Nagel.
“I would like to believe that we will hopefully see better inflation numbers,” Nagel said on Monday evening in Frankfurt. However, reliable data tends to suggest that the inflation rate will remain on a high plateau for a while before it could then go down more significantly.
Oil prices had recently fallen, while at the same time the upward trend in prices at the manufacturer level had weakened significantly in October in Germany, fueling hopes of a drop in the high level of inflation.
According to Nagel, the inflation rate in Germany should remain high in the coming year. “I think it’s likely that the annual average will be seven before the decimal point,” said the Bundesbank President. High inflation is also having a negative impact on the economy in the euro zone. “The massive increase in prices is broad-based. It is particularly slowing down private consumption.”
In December, the European Central Bank (ECB) will follow up with a further interest rate hike in order to bring the inflation rate in the euro area back to 2 percent in the medium term, said Nagel, who as Bundesbank President in the ECB Council decides on monetary policy in the common currency area. The size of the interest rate step will depend on how the data and the outlook develop. The central bank will present its current economic and inflation forecasts at the next interest rate meeting on December 15th.
In addition to further interest rate hikes, the Bundesbank President believes that the normalization of monetary policy also includes a reduction in the ECB’s balance sheet, which has been bloated by billions in bond purchases. “For me, there is a lot to be said for beginning next year with no longer fully replacing maturing bonds as part of the APP,” said Nagel. That would also be another important signal from the ECB Governing Council to combat inflation.
Extremely high price
On July 1, 2022, Europe’s currency watchdogs stopped buying new securities as part of the general APP purchase program. So far, however, funds from securities whose term has ended have been reinvested in their entirety. In total, the ECB invested around 3.4 trillion euros in government bonds and corporate securities by the end of October as part of the program that has been in use since March 2015. ECB President Christine Lagarde said at the end of October that the central bank would decide on the principles for the reduction of its APP bond purchase program in December.
The ECB is aiming for price stability in the euro area in the medium term with inflation of two percent. In October, consumer prices in the currency area of the 19 countries were 10.6 percent above the level of the same month last year. Since July, the central bank has been fighting the extremely high rate of inflation with sharp interest rate hikes. The key interest rate in the euro area, which was frozen at a record low of zero percent for years, is now 2.0 percent.
