WASHINGTON (Reuters) – European Central Bank President Joachim Nagel said on Saturday that the European Central Bank needs several more rate hikes to tame inflation despite the prospect of a deep recession in Germany, and should also consider shrinking its balance sheet. .
The European Central Bank has raised rates twice already this year, but at 0.75%, the deposit rate is still well below levels most people consider appropriate when inflation is at 10% and could remain above the bank’s 2% target for years to come.
“Further rate hikes will be needed to bring inflation back to 2% over the medium term — and not just at the end of October monetary policy meeting,” Nagel said in a speech in Washington.
“The ECB Governing Council should not give up too soon.”
Markets are currently quoting at 75 basis points on October 27, the same increase as in September, and few policymakers have publicly dismissed this forecast.
“As monetary policy continues to normalize, we will also need to consider reducing the European system’s asset holdings, which amount to nearly €5 trillion,” Nagel added.
While the ECB has not provided any timetable for its balance sheet shrinkage, a process often called quantitative tightening, policy makers seem to be calling for it to start only in 2023, arguing that the bulk of the rate hike must happen before the bank begins The European Central allowed some of the debt pile to expire.
Monetary policy tightening is needed as inflation is likely to remain high, and Nagel predicted Germany’s interest rate could reach more than 7% next year.
A complication in the process is that the 19-nation eurozone is facing a recession with Germany, its largest economy, likely among the biggest losers.
“GDP (in Germany) could drop significantly in the last quarter of 2022 and the first quarter of 2023,” Nagel said. “That would mean a recession, that is, a large-scale, long-term decline in economic output.”