The president of the German central bank prepared the ground on Sunday for new “significant” interest rate hikes in the euro zone in the face of soaring inflation despite the risk of recession which is becoming clearer.
“The step taken on Thursday” by the European Central Bank to raise its key rate by 0.75 percentage point “was a significant signal,” said Joachim Nagel.
“And if the inflationary situation remains as it is, other significant steps will have to be taken,” he warned.
“We have indications that inflation is spreading across many areas” of the economy, Nagel added.
He estimated that the inflation rate in Germany might reach a level “over 10%” over one year in December, a period which in his view should be the peak of the current inflationary surge.
The Bundesbank has so far been talking regarding a rate of 10% in the last months of the year and has thus darkened its forecast a little further.
Inflation should in his view decelerate in 2023 but Mr. Nagel estimated that it should remain “above 6%” next year, a level “much too high”.
Under these conditions, a continuation of the tightening of the cost of credit in the euro zone is unavoidable, said the boss of the German central bank, despite the negative impact that this policy risks having on growth.
Mr. Nagel considered it “possible” that Germany, Europe’s largest economy, slips into recession in the 3rd and 4th quarters of this year, and also remains there until the beginning of next year.
“There are a number of elements” that lean towards this scenario, he said.
The European Central Bank, whose main task is to ensure price stability, is aiming for an inflation rate of 2%.
Caught up by record and persistent inflation, it decided on Thursday to raise its interest rates on an unprecedented scale and its president, Christine Lagarde, warned that other increases would follow.
The Board of Governors of the monetary institution decided to raise its key rates by 75 basis points, a first in two decades of existence – apart from a technical adjustment in 1999.
