The head of the German Bundesbank is in favor of a wait-and-see monetary policy. Inflation could be under control by 2025. In his view, reducing interest rates prematurely would be “fatal”.
Bundesbank President Joachim Nagel has warned against cutting interest rates in the euro area too quickly. “In previous interest rate cycles, waiting was always a better approach than reacting too early,” he said in an interview with the Reuters news agency on the sidelines of the G20 meeting in Sao Paulo, Brazil. “It would be fatal if we cut interest rates too early and then inflation comes back again.” That is also a question of credibility. Otherwise there would be a risk of greater fluctuations on the financial markets.
According to Nagel, the European Central Bank (ECB) is currently on the right track: “I am confident that the inflation issue will be resolved by 2025.” By then, the goal of an inflation rate of two percent could be achieved again. “It is now a question of when a possible interest rate cut could follow,” said the Bundesbank boss.
“Don’t make a mistake on the last stretch of the journey”
The two percent mark is considered optimal for the economy, but has been significantly exceeded in recent months and years. In autumn 2022 it was over ten percent at times. The ECB raised interest rates ten times in a row to combat high inflation. The deposit rate that is relevant on the financial market and that financial institutions receive when they park excess funds with the central bank has been at a record level of 4.00 percent since September 2023.
Nagel said the interest rate increases had had an impact. “We’ve already achieved a lot with this. We can’t make any mistakes on the last part of the journey.” Recently, price inflation in the Eurozone actually decreased noticeably. In January, consumer prices only rose by 2.8 percent compared to the same month last year. In October, inflation fell below three percent for the first time since July 2021.
Meanwhile, France’s Finance Minister Bruno Le Maire was even more confident than Nagel in Sao Paulo. In his opinion, inflation in Europe and the USA has already been defeated. This was a great success, he said.
High wage agreements are a cause for concern
The ECB will next discuss key interest rates on March 7th in Frankfurt. New projections for economic development and inflation are then expected. Nagel said more data is needed before a rate cut. “In my opinion, the path is not yet finally secured. More reliable data on wage developments and confirmation that we will be at two percent inflation in 2025 with the new data are still missing.”
Next week’s projections are an important milestone, emphasizes the top German monetary authority. Nagel considers it problematic that so-called core inflation is still over three percent. In January, this measure, which excludes the fluctuating prices for energy, food, alcohol and tobacco, was still at 3.3 percent. Core inflation is considered an important barometer for underlying price trends.
The ECB is currently concerned about the comparatively high wage agreements. From the point of view of many monetary authorities, these are currently one of the most important drivers of inflation.