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ECB's Interest Rate Hike Strategy Necessary to Curb Inflation, Affirms Bundesbank's Nagel

Bundesbank President Joachim Nagel emphasizes the need for the European Central Bank (ECB) to increase interest rates multiple times to effectively control inflation.

Joachim Nagel
Joachim Nagel

Persistent ECB Rate Hikes: An Imperative Measure

The ECB will have to further raise interest rates several times and then maintain them at a high level until inflation is fully under control, according to Bundesbank President Joachim Nagel. His Tuesday remarks highlighted the bank's consistent effort in fighting inflation. Since last July, the ECB has escalated rates by a cumulative 375 basis points and pledged to continue its policy tightening to deal with surging price growth.

End of Monetary Policy Tightening Still Far Off

"Monetary policy tightening is yet to reach its end," Nagel stressed in his speech. Several additional interest rate steps will be necessary to reach a sufficiently restrictive level. Following this, maintaining this restrictive level for an ample duration is crucial until inflation subsides sustainably. Even though the ECB is nearing the last phase of its policy tightening, the fastest in its 25-year history, several more hikes will be essential.

Predicting the Peak of Interest Rates and Ensuring Price Stability

Contrarily, Francois Villeroy de Galhau, French central bank chief, predicted on Monday that rates might peak by the end of this summer. The real concern is determining how long they will need to remain elevated. Current inflation is still at an alarming 7%, surpassing the ECB's target of 2%. Nagel reassured, "I will not let up until price stability is restored. Our medium-term goal is 2%, no more and no less. We aim to achieve this goal soon."

The Future of ECB's Interest Rates Amid Market Expectations

Given the situation, two or three additional rate hikes may be required, pushing the ECB's deposit rate to 3.75% or 4.00% by September's end. However, markets expect two more 25-basis-point hikes and foresee a rate cut in early 2024. This expectation has been met with resistance from some ECB policymakers.