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12° Nicosia,
20 June, 2024
 
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No plans to cut interest rates amid inflation worries

Dr. Nagel cautions against hasty conclusions in ECB analysis

Panayiotis Rougalas

Panayiotis Rougalas

The perspective advocated by many young individuals, endorsing a declaration of victory over inflation, is articulated by Dr. Jensen, the president of the German Bundesbank. Joachim Nagel, noting that a resurgence in inflation figures may necessitate a reevaluation, highlights the potential need to raise interest rates. Conversely, the German banker deems the opposite scenario as considerably less likely.

During a conference on "developments in the European economy and the effectiveness of monetary policy" hosted by Dr. Nagel and the governor of the Central Bank of Cyprus, Konstantinos Herodotou, it was observed that the ECB collectively raised rates by 450 basis points. This surge represents the most substantial and rapid increase in the history of the European monetary union.

Dr. Nagel emphasized that setting interest rates remains crucial in combating high inflation, underscoring the importance of the Governing Council's awareness of current levels affecting inflation in various regions, including England.

Regarding the argument that lower interest rates could spur economic growth without jeopardizing price stability, Dr. Nagel expressed skepticism, stating he remains unconvinced by this reasoning.

Notably, Dr. Nagel asserted that a "hard landing" can be averted. He pointed to indicators such as a tight labor market, low corporate and household debt levels, and robust investment activity, suggesting conditions favor a "soft landing." The German banker cautioned against premature easing, emphasizing potential negative consequences and the need for subsequent, possibly more forceful, tightening.

In his speech, Dr. Joachim Nagel expressed gratitude for the invitation to Cyprus, highlighting the historical significance of the region. He emphasized the importance of acknowledging Europe's common historical and cultural heritage, symbolized by the euro.

Transitioning to contemporary challenges, Dr. Nagel addressed the economic outlook in the euro area. Noting a period of economic weakness influenced by tighter monetary policy, he discussed factors impacting real GDP growth, including weak private consumption and external demand. Despite a downward revision in the ECB's September economic forecast, Dr. Nagel anticipates a recovery in economic growth in 2024, driven by wage increases and improved export activity.

In Germany, challenges such as sluggish foreign demand and high energy prices are expected to impact the industrial sector negatively, leading to a forecasted economic contraction. In contrast, Cyprus is anticipated to experience real GDP expansion, driven by strong domestic demand.

Regarding inflation, while rates are expected to decrease over the next two years, Dr. Nagel cautioned against premature declarations of victory. Reflecting on the 2021 inflation surge, he attributed it to factors like disruptions in supply chains and changes in demand due to the Covid-19 outbreak. Responding decisively, the ECB halted asset purchases, raised base rates, and initiated a substantial reduction in the balance sheet.

Dr. Nagel affirmed that interest rate adjustments remain a vital tool in combating high inflation. While current levels are seen as contributing to inflation targets, he emphasized the need for their sustained maintenance. The possibility of future interest rate increases remains contingent on the inflation outlook, with premature rate cuts considered unwarranted speculation.

The speech concluded with Dr. Nagel highlighting the significance of not only the level but also the future expectations of interest rates in shaping policy impacts on inflation. The full effects of policy tightening on inflation are yet to be fully realized.

[This article was translated from its Greek original]

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Cyprus  |  economy  |  Germany  |  bank  |  Europe

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