The head of Germany’s central bank has warned inflation is a “very greedy beast” and it would be a “first-order error” to stop raising interest rates even if it keeps falling in the coming months.
Joachim Nagel, president of the Bundesbank, on Wednesday said some central banks in the past had given up too early in the fight against inflation and it was his “intention that we should really prevent this” from happening in the eurozone.
Nagel’s comments underline how many central bankers are determined to keep raising borrowing costs until they are convinced they have squeezed economic activity enough to bring inflation back down to their 2 per cent target.
He was backed up by fellow European Central Bank governing council member Isabel Schnabel, who warned the eurozone’s “incredibly strong” labour market ran the risk of a “wage-price spiral” similar to the one that caused surging inflation after the oil shocks of the 1970s. “We have to monitor this very carefully,” she said.
The latest scare for monetary policymakers was Wednesday’s UK inflation data showing the headline rate had not fallen as widely expected, but was stuck at 8.7 per cent in May and the core rate — excluding energy and food — continued to accelerate above 7 per cent.
The US Federal Reserve skipped a rate rise for the first time in more than 10 meetings last week, but its chair Jay Powell signalled on Wednesday that more policy tightening was likely as he said the battle against inflation was not over.
Eurozone inflation has fallen from a peak of 10.6 per cent in October to 6.1 per cent in May and it is likely to continue falling “in the next weeks and months”, Nagel told an event in Berlin organised by Germany’s council of economic experts.
“In that situation it would be a first-order error to give up too early, despite the fact that we see some . . . effects that we do not like,” he added.
The ECB last week raised its deposit rate by a quarter point to 3.5 per cent — its highest level for 22 years. It also increased its forecasts for inflation over the next three years and predicted price growth would still be above its target in 2025.
“It was pretty easy to do monetary policy up until now,” Nagel said. “Now the art of monetary policy has started. Now it gets a little bit more complicated.”
Investors have responded to last week’s hawkish signals from the ECB by pricing in a stronger chance that it will raise rates by a further quarter point both in July and September.
Schnabel told the same event that vacancies in the eurozone had risen to a “historical high” in proportion to the number of unemployed people and “this raises the bargaining power of the workers and of course the wages are increasing faster than we thought”.
“If, as we have seen in the first quarter, productivity growth remains negative or at least does not recover as we have seen in the projections, then I think there is a risk that this could turn into such a wage-price spiral,” she said. The ECB assumes companies will absorb higher wages by lowering their profit margins, “but of course that is uncertain”, she added.
Labour costs in the eurozone rose at an annual rate of 5 per cent in the first quarter, more than double the historical average. Job vacancies in the bloc accounted for 3 per cent of all jobs in the period, while the unemployment rate fell to a record low of 6.5 per cent in April.
Source: Economy - ft.com
