MNI: Upwards Price Pressure May Stay- Bundesbank's Nagel

More interest rate rises will be needed to curb euro area inflation, the head of the German Bundesbank said in a speech Thursday, as he warned monetary policy may be operating in a permanently changed environment of tight labour markets and higher wages.

Monetary policy is having an effect, albeit not “excessively so," Nagel said, and, at 3.5%, the ECB’s deposit rate is not yet high enough to bring inflation back to target in a timely fashion.

Strong wage growth and falling inflation are expected to boost consumer spending in the months ahead, Nagel said, driving economic growth even as monetary policy dampens demand.

However, labour shortages are evident in an increasing number of sectors in Germany and the euro area, and are likely to persist due to demographic changes, he said. (See MNI INTERVIEW:ECB Dilemma As German Inflation Outruns Eurozone)

“A changed environment for monetary policy could also result from permanently tight labor markets. In this case, greater bargaining power on the part of employees could lead to strong wage growth and thus to sustained inflationary pressure," he said.

Nagel expressed satisfaction with the ECB’s decision to end reinvestments from its Asset Purchase Programme, saying that “more speed in reducing the balance sheet is good,” with markets well able to cope. “Even if there were a bit more market volatility, that wouldn't be a disaster,” he continued, “because even before the financial crisis in 2008 there was a lot more volatility than at present. But of course, we will keep an eye on ensuring that the process as a whole is approached in a measured way.”

He called on the German government not to extend energy price brakes beyond the end of this year, and was critical of proposed country-specific reforms to the EU’s Stability and Growth Pact, which he said would weaken the rulebook and limit countries’ abilities to act in a new crisis.