The interest rate turnaround by the ECB is not yet complete.
(Foto: imago images/Future Image)
Frankfurt / Dublin Leading members of the European Central Bank (ECB) believe that interest rates in the euro area will continue to rise. ECB chief economist Philip Lane told the Irish broadcaster RTE on Saturday that he assumes that the next interest rate meetings of the ECB this year and at the beginning of next year will not be the end of the phase in which interest rates have been raised to a normal level would have to be. Bundesbank President Joachim Nagel said that the ECB was still a long way from the level of interest rates that would neither boost nor slow down the economy. For him it is important that there are further increases. “Something has to happen, something has to go up.” If the inflation picture stays the way it is now, and that becomes apparent, “then further interest rate hikes can be expected”.
In the fight against escalating inflation, the ECB initiated the turnaround in interest rates in July and raised the key rates for the first time since 2011. Key interest rates were raised by 0.50 percentage points. With their second rate hike on Thursday a week ago, the monetary watchdogs followed up even more significantly with an increase of 0.75 percentage points. The key interest rate is now 1.25 percent and the so-called deposit rate is 0.75 percent.
Lane said the deposit rate is still too low to stimulate the economy. Therefore, the task of the ECB is not yet done. Speaking about interest rate hikes in general, he said it was believed that this would dampen demand. “And we will not pretend that this is painless.” The economy of the euro zone will probably stagnate in the winter months. In view of high energy prices and a shortage of natural gas, a recession cannot be ruled out.
Nagel said at the German central bank’s open day in Frankfurt that inflation had eaten its way into almost all areas of life. “We are still a long way off with interest rates, where the interest rates then match the inflation rate that we are aiming for.” The ECB is targeting two percent inflation as the ideal value for the economy, but in August it was 9 in the euro area .1 percent. “Inflation always has a social dimension, which is why it’s so dangerous,” Nagel said. It is dangerous for competitiveness and growth prospects. However, a quick solution cannot be promised.
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For Germany, Nagel expects prices to continue to rise: “At the Bundesbank, we may see the peak of inflation in December, at the end of the year, possibly then with inflation rates in the double-digit range.” That was last the case in the fourth quarter of 1951. That shows the dimension with which the central bank is dealing. It could be that there is an economic slowdown if you have to counteract this with higher interest rates. However, Nagel does not anticipate a sharp recession in Germany: “From today’s perspective, I do not see a harsh, severe recession for Germany.”
Nagel commented positively on the federal government’s measures: “From the Bundesbank’s point of view, the federal government’s third relief package is very helpful.” It starts where help is most needed. In view of the sharp rise in energy prices, the federal government has put together a new package of at least 65 billion euros to support citizens and companies. The volume is more than twice as large as that of the first two packages with a total of 30 billion euros.
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