The European Central Bank is determined to continue fighting inflation while also standing ready to respond to any potential stress in markets, according to Bundesbank President Joachim Nagel.
(Bloomberg) — The European Central Bank is determined to continue fighting inflation while also standing ready to respond to any potential stress in markets, according to Bundesbank President Joachim Nagel.
The latest turmoil around banks has highlighted the importance of financial stability, Nagel said in a speech in Karlsruhe, Germany. He called Europe’s banking system strong, saying it can lean on the ECB and national central banks for support if needed.
“It’s becoming ever more important to decide on further monetary-policy steps from meeting to meeting considering economic and financial developments,” Nagel said Monday. “Rest assured, however, that we’ll continue to move forward resolutely on the path of monetary normalization until inflation is contained and price stability is restored.”
The ECB raised its deposit rate by a half-point this month to 3%, even after bank failures in the US and the collapse of Credit Suisse Group AG raised questions over the health of Europe’s financial system. Deutsche Bank, Germany’s largest lender, was at the center of a selloff in financial stocks last week, but has partially recovered since.
“I’d like to emphasize that the European banking and financial system is resilient and solid,” Nagel said, without mentioning individual institutions. “It has strong capital and liquidity positions. At the same time, the Eurosystem has suitable instruments to provide support if necessary.”
He said that rate increases to date — 350 basis points since last July — are yet to show their full impact on the economy. With inflation still “much too high” and “far away” from the medium-term goal of 2%, policymakers should soon be in a position to accelerate the reduction in the ECB’s bond holdings, which started this month.
“In my view, it can be accelerated from the summer,” Nagel said. “Markets will be able to handle it well, and in terms of monetary policy, it’s necessary to reduce the balance sheet of the Eurosystem more quickly.”
Commenting on German inflation dynamics, he said price pressures have probably peaked but will only ease slowly. Inflation will average about 6% this year and remain significantly above 2% in 2024.
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