Monetary policy: Bundesbank President Nagel: ECB interest rate increase likely in December

The inflation rate in the euro area is nowhere near where the euro currency watchdogs want it to be. The Bundesbank President has a clear opinion on what the ECB should do in December.

Joachim Nagel: The Bundesbank President expects higher inflation. Photo: Soeren Stache/dpa

The European Central Bank (ECB) is heading for an interest rate hike in December. According to the current assessment, an increase is “very likely necessary,” said Bundesbank President Joachim Nagel, who is a member of the ECB Council, according to the text of the speech in the evening in Berlin. “From today's perspective (...) there is hardly any way around an interest rate increase if the inflation outlook does not improve significantly.” The Governing Council of the ECB will meet for its next monetary policy meeting on December 17th.

In response to the rise in inflation, mainly due to higher energy prices, the euro's monetary authorities have already raised key interest rates twice this year. At their meeting last week, they left the deposit interest rate, which is important for banks and savers, at 2.5 percent.

Higher key interest rates make loans more expensive, which can slow down demand and thus dampen inflation. However, higher interest rates are also a burden for everyone who wants to invest. This can slow down the economy.

The Iran war is driving up energy prices and fueling inflation. In September, consumer prices in the euro area were 3.8 percent higher than in the same month last year. This is the highest value in three years. According to the ECB's latest assessment, people in the euro area will have to prepare for increased inflation until at least 2027.

“In our view, it is now very likely that inflation pressure will be higher than expected in September,” said Nagel. "In addition, repeated surges in energy prices can also drive up the prices of other goods and services. And they can increasingly have an impact on wage demands. That would in turn drive prices up."

In the medium term, the ECB is aiming for an inflation rate of 2.0 percent for the euro area, which now includes 21 countries. With this mark, the central bank sees its most important goal fulfilled: ensuring a stable euro and maintaining people's purchasing power.