Euro zone inflation is still not as low as the European Central Bank would like, so interest rates need to remain sufficiently high to resolve price pressures, Bundesbank President Joachim Nagel said on Wednesday.
The ECB cut rates for the second time this year on Thursday and markets are now trying to guess when the next move is coming, with most bets focused on December and some also putting money on another cut in October.
Nagel would not, like some of his colleagues, close the door on December, but noted that hurdles remained.
“Inflation is currently not where we want it to be,” he told a speech in Frankfurt.
While inflation fell to 2.2 per cent in August and may fall even closer to the ECB’s 2 per cent target this month, it will likely rise again towards the end of the year and could end 2024 around 2.5 per cent.
A key issue is that wage growth remains rapid and could put upward pressure on private consumption, and thus prices.
“In Germany, high wage increases were agreed in the most recent collective bargaining agreements,” Nagel said. “And relatively high new agreements are also expected in the upcoming negotiations.”
He added that labour shortages in Germany would likely keep upward pressure on wages even in the longer term.
While Nagel declined to say he preferred only quarterly interest rate cuts, like some other prominent conservatives, he did argue for “staying power” to defeat inflation.
“Depending on the incoming data, the time intervals between the potential steps may vary,” he said. “This is because the monetary policy course must remain sufficiently tight for long enough for the inflation rate to return to the 2 per cent target in the medium term.
“We now need to show that we have enough staying power,” Nagel said.