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ECB's Nagel calls for more, big rate hikes -BZ

ECB-POLICY-BUNDESBANK:ECB's Nagel calls for more, big rate hikes - BZ
ECB-POLICY-BUNDESBANK:ECB's Nagel calls for more, big rate hikes - BZ Copyright Thomson Reuters 2023
Copyright Thomson Reuters 2023
By Reuters
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FRANKFURT - The European Central Bank needs more, big interest rate increases to bring inflation back to 2%, but it should proceed one step at a time given the prevailing uncertainty, ECB policymaker Joachim Nagel told a German daily.

The hawkish president of the Bundesbank joined a chorus of policymakers calling for even more tightening in the spring after the ECB raised borrowing costs last week and pencilled in another increase for March.

"From where I stand today we need further, significant rate hikes," Nagel told Boersen-Zeitung. "But I find it right that we proceed step by step."

Current ECB rates did not seem "restrictive," he said, as they were well below the rate of inflation.

ECB board member Isabel Schnabel, speaking separately, also said there was little evidence that rates had risen far enough.

"We are now seeing a tightening in the credit market," Schnabel told an event organised by the Finanzwende activist group. "But it is not yet clear that monetary policy is actually working so much that we can hope for inflation to return to our inflation target of 2% in the medium term."

The ECB raised rates by a half a percentage point to 2.5% on Thursday and promised a similar move in March, but kept its options open about subsequent steps, leading traders to speculate that the end of the hiking cycle was in sight.

Nagel pushed back on that notion, saying the ECB should only stop when it was sure inflation was heading back to its 2% goal, and dismissed speculation about a rate cut by the end of 2023.

He also said inflation in Germany should come somewhere between 6% and 7% this year - down from an earlier prediction of 7% or more.

In addition, he predicted no "hard landing" for the German economy, Europe's largest, which had been seen as one of the worst hit by the energy crisis arising from Russia's invasion of Ukraine.

Nagel said financial markets should digest well the ECB's plan to stop replacing some of the 5 trillion euros ($5.34 trillion) worth of bonds that it owns when they mature and said it should happen at a faster clip.

The ECB said it would reduce reinvestments under its Asset Purchase Programme, its flagship stimulus scheme of the last decade, by 15 billion euros per month between March and June before reviewing the monthly pace.

"We should take a good look at how much we can increase the pace of the unwind from July onwards," Nagel said. "The 15 billion euros per month should not be the end of the road."

Asked about the likely losses the Bundesbank will suffer on the bonds it owns, Nagel said the effects on the 2022 financial year weren't large, though they would become apparent this year and the next.

He reaffirmed these losses should be covered by existing provisions, and if they were too big, they could be carried forward to future financial years.

($1 = 0.9369 euros)

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