© Reuters. FILE PHOTO: The logo of the European Central Bank (ECB) is pictured outside its headquarters in Frankfurt, Germany, December 8, 2016. REUTERS/Ralph Orlowski/File Photo
FRANKFURT (Reuters) – The European Central Bank should raise interest rates in July to stop high inflation from getting entrenched, Bundesbank chief Joachim Nagel said on Tuesday, joining an already long line of policymakers calling for quick rate moves.
With inflation soaring to a record high 7.5% last month, policymakers are increasingly advocating a rapid unwinding of stimulus, and several, including board member Isabel Schnabel, have made the case for a rate hike already in July.
Nagel, a newcomer to the ECB Governing Council, said that in the first step, the ECB should end bond purchases, known as quantitative easing, at the end of June, then start lifting the minus 0.5% deposit rate at its following meeting.
“If both the incoming data and our new projection confirm this view in June, I will advocate a first step normalising ECB interest rates in July,” Nagel said.
A July rate hike would be a remarkable turnaround for the ECB.
Just a few months ago the bank said that such a move was “highly unlikely” and now some, including French central bank chief Francois Villeroy de Galhau, are calling for rates to rise back into positive territory this year, which would likely require three separate, 25 basis point increases.
Nagel said that quick ECB action was needed because a delay would force the ECB to be more abrupt later.
“The risk of acting too late is increasing notably,” he said. “The more inflationary pressures spread, the greater the need for a very strong and abrupt interest rate hike.”
Although inflation is primarily fuelled by soaring energy prices, there is “disturbing evidence” that price growth is gaining momentum and is becoming more widespread, Nagel said.
Wages may not yet be responding but major wage negotiations in Germany, the euro zone’s biggest economy, are not due until the second half of the year and some demands are already very high.
Inflation expectations are also rising, according to various surveys of households and businesses, Nagel added.
“All this suggests that higher inflation rates will prevail in the near future and that inflation expectations could become less anchored,” Nagel said.
ECB should raise rates in July to curb inflation: Bundesbank chief