ECB should keep in mind a rate hike in 2022 if inflation justifies it, says Bundesbank chief

The European Central Bank should continue to normalize monetary policy and anticipate raising interest rates, possibly as soon as this year, if the inflation outlook warrants it, Germany’s central bank president Joachim Nagel said on Monday.

As Russia’s war in Ukraine darkens the outlook, the ECB took only a small step in withdrawing its monetary stimulus earlier this month and some policymakers are calling for caution in short-term strategy, despite inflation hitting a record 5.9%, nearly three times the target of the euro zone’s central bank.

Nagel, however, took a more tightening stance, warning that high inflation could take hold and that if the ECB raises interest rates too late it would be forced to normalize policy abruptly, a situation that would stifle the economy growing.

“It is clear to me that if the inflation outlook requires it, we should continue to normalize monetary policy and also start raising our interest rates.”said Nagel, president of the Bundesbank, in a speech.

“If net asset purchases end in the third quarter as currently forecast, this opens up the possibility of raising key interest rates this year, if necessary.”, he added.

The ECB said earlier this month that it will not reflect a rush to raise rates and may even pause normalization after ending bond purchases.

But more conservative governors, including Dutch central bank chief Klaas Knot, have argued that a rate hike, the first of its kind in more than a decade, should remain on the table as inflation is not as transitory as the ECB expected.

In fact, Nagel argued that the longer the current episode of high inflation lasts, the more likely it is that expectations of consumer price rises will rise, strengthening the risk scenario.