MNI BRIEF: Euro Economy Very Weak, Road to 2% 'Bumpy' - Nagel

Europe’s economy is experiencing a period of “pronounced weakness,” Bundesbank chief Joachim Nagel said in a speech Thursday, and the road to stable 2% inflation would be a “bumpy one with many ups and downs.” The pace of price increases is set to rise even if energy prices remain at their present level, he said, with the main effect on inflation of previous rate hikes expected to take hold in 2024.

Underlying inflation dynamics are still “quite strong” and the decline in overall inflation seen in recent weeks is unlikely to continue over the coming months, meaning it is not yet clear whether the hiking cycle is over.

Higher interest rates have increased credit risk and put a strain on public finances, Nagel conceded. But it would be a mistake to cut too soon, leaving it to lenders, supervisors and fiscal authorities to see that such risks are contained, he said, with policy decisions remaining a meeting-by-meeting affair. (see MNI SOURCES: Market Pricing For Cut Prompts ECB JawboningJawboning)

Nagel commended the fact that the ECB has managed to shrink its balance sheet by EUR 1.7trillion over the past 12 months. Nagel noted that it will still take “many years for the balance sheet to return to a size which is appropriate for normal times.” (see MNI INTERVIEW2: ECB To Discuss PEPP Reinvestment In Dec-VujcicVujcic)