(new: Statements by central bank governors Nagel and Knot)
FRANKFURT (dpa-AFX) – Europe’s currency watchdogs promise a determined effort against the still record high inflation. “We expect to continue raising interest rates,” said the President of the European Central Bank (ECB), Christine Lagarde, on Friday at a banking congress in Frankfurt. “Ultimately, we will raise interest rates to a level that brings inflation back to our medium-term target in a timely manner.”
Bundesbank President Joachim Nagel called for “further decisive steps”. He thought it was “wrong to wait for further decisive steps for fear of a downturn”. the monetary policy must not let up too soon. “Inflation is a tough nut to crack. If we want to crack it, monetary policy must also be tough,” said the Bundesbank President, who has a say in the ECB Council’s monetary policy course.
The head of the Dutch central bank, Klaas Knot, argued similarly at the congress: “Resolute advocacy for price stability” is now needed, otherwise “taming inflation” will become much more expensive.
The ECB is aiming for price stability in the euro area in the medium term with inflation of two percent. In October, consumer prices in the currency area of the 19 countries were 10.6 percent above the level of the same month last year. “Inflation in the euro area is far too high,” Lagarde said. In addition, the risk of a recession has increased, although the latest economic data had surprised positively.
After much hesitation, the ECB has been bracing itself against the extremely high inflation with sharp interest rate hikes since July. The key interest rate in the euro area, which was frozen at a record low of zero percent for years, is now 2.0 percent. Deutsche Bank boss (Deutsche Bank) Christian Sewing praised Lagarde for changing course: “I would like to congratulate you on the way in which you managed to turn monetary policy around.”
Lagarde announced that the ECB would also normalize its other monetary policy instruments. The ECB’s balance sheet, which has swelled over the years as a result of billions in securities purchases, must be normalized “moderately” and “in a predictable manner”: “In December we will set out the most important principles for reducing the bond portfolios in our purchase program.” The Governing Council will meet again on December 15th.
Bundesbank President Nagel spoke out in favor of starting to reduce the size of the multi-billion dollar bond holdings in the Eurosystem at the beginning of 2023 by no longer reinvesting all the money from maturing securities: “The additional tightening would help to keep inflation down reduce.”
Beyond the fight against inflation, Deutsche Bank boss Sewing sees an urgent need to make the European capital market more competitive. Europe must “urgently change course if we don’t want to let foreign banks finance Europe’s future primarily,” warned Sewing, who is also President of the Association of German Banks (BdB).
“We need an Agenda 2030 for Europe. And the very first step must be that we finally create a real European home market,” demanded Sewing. Europe cannot be competitive without a significant increase in private investment. “We will neither master the sustainable transformation nor be able to keep up technologically,” warned Sewing. “That’s why it’s so important to finally push ahead with the capital markets union in order to create a liquid and attractive market for domestic and foreign investors.”
The capital markets union is essentially about removing bureaucratic hurdles between the individual states of the European Union in order to give companies more opportunities to raise money. The EU Commission has had plans for this since 2015.
At the same time, Sewing called for a readjustment of banking regulations: “It is becoming increasingly clear that the current regulatory framework is doing little to strengthen European banks.” ECB President Lagarde also stressed the importance of a resilient financial sector to face the multi-billion dollar challenges of the coming years: “Too much regulation would make banks more vulnerable to shocks and less able to support the transitions from which our future growth will depend.”/ben/stw/DP/stw
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