German Bundesbank chief defends ECB's tightening policy

FRANKFURT, July 4: Joachim Nagel, president of the central bank of Germany (Deutsche Bundesbank), on Monday, said that inflation in the eurozone remains too high and that the European Central Bank (ECB) still has "a way to go" to bring it down to the target level.

Addressing the 2023 edition of the Euro Finance Summit here, Nagel defended the ECB's decision to aggressively hike interest rates in a bid to tame the eurozone's "stubborn" inflation.

Nagel noted that the ECB had increased key interest rates by 400 basis points since July 2022, which was totally not expected one year ago.

The rate hikes, according to Nagel, are exactly what the ECB needs to do.

The ECB has missed its price stability target of 2 percent for two years, he said.

Citing the latest ECB forecast, Nagel warned that eurozone inflation, despite its recent decline, is expected to hover at 5.4 percent in 2023, 3.0 percent in 2024, and 2.2 percent in 2025. "Upside risks to the price outlook dominate."

Responding to arguments that the 2 percent target should be abolished and central banks should raise their target to levels well above 2 percent, Nagel said that softening the target would help raise medium-term inflation expectations and might make inflation entrenched.

"Monetary policy would have to react with higher and longer key interest rates," he said. Echoing ECB President Christine Lagarde, Nagel said that the ECB would raise its rate again in July.