MNI BRIEF: Hike Rates, Shrink Balance Sheet, Buba Head Urges
Tight labour markets, strong wages and profits all offer upside inflation risk, Joachim Nagel says.
The ECB should continue to raise interest rates while increasing the speed of its balance sheet reduction from July, Bundesbank chief Joachim Nagel said Friday, with tight labour markets, strong wage growth this year and in the “coming years,” and demographic decline in the labour supply likely to aggravate price pressures.
“If inflation develops as projected, this should, in my view, not mark the end of the hike sequence. It will be necessary to raise policy rates to sufficiently restrictive levels in order to bring inflation back down to 2% in a timely manner. We should likewise keep policy rates sufficiently high for as long as necessary to ensure lasting price stability,” he said.
A pick-up in the pace at which reinvestment of the ECB’s maturing APP portfolio is reduced -- currently EUR 15 billion per month -- would be “welcome” in the third quarter of 2023, Nagel said.