© Reuters. FILE PHOTO: Bundesbank President Joachim Nagel addresses a news conference after the G7 Summit in Koenigswinter, near Bonn, Germany May 20, 2022. REUTERS/Benjamin Westhoff
FRANKFURT (Reuters) – German inflation expectations are showing a worrisome rise, putting price stability at risk, so timely European Central Bank rate hikes are needed to avoid even bigger policy moves later, Bundesbank President Joachim Nagel said on Thursday.
The ECB – which is still just planning a rate hike when most of peers have already moved to contain rapid inflation – has been accused by some of falling behind the curve, reacting too late and with timid steps, raising the risk that high inflation gets entrenched.
“The risk of inflation expectations becoming de-anchored has risen over the past months,” Nagel said in a speech. “Risks to price stability exist.”
“Inflation expectations of households and firms in Germany are somewhat less anchored than, say, a year ago,” he said. “The increase is worrying.”
The ECB plans to raise rates by 25 basis points in July, its first increase in over a decade, followed by a potentially larger move in September.
By contrast, the U.S. Federal Reserve, the only central bank that is larger than the ECB, raised rates by 75 basis points this month and markets expect a similar move at its next meeting.
Avoiding direct criticism of the ECB, Nagel warned that acting too late could result in more forceful action later, which could then slow or crash growth.
“If monetary policy falls behind the curve, even stronger hikes in interest rates could become necessary to get inflation under control,” Nagel said. “This would create much higher economic costs.”
ECB’s Nagel: Rise in inflation expectations ‘worrying’