13 January 2022

POLITICO: New Bundesbank boss warns high inflation could last longer than expected

Eurozone inflation could remain high for longer than the European Central Bank currently projects, incoming Bundesbank President Joachim Nagel warned Tuesday as he delivered his inauguration speech.

"The medium-term price outlook is exceptionally uncertain," Nagel said. "I currently see a greater risk that the inflation rate could remain high for longer than currently expected. In any case, monetary policy must be on guard."

The comments suggest that Nagel's position may not in fact deviate significantly from his predecessor, Jens Weidmann, who was a leading hawk on the ECB.

Nagel underscored three key questions for policymakers: How persistent high inflation rates will be; whether the ECB's loose monetary policy is still appropriate (and if so, for how long); and how policymakers should deal with the high level of uncertainty.

Even though eurozone inflation hit a record high of 5 percent in December, the ECB is standing firm on its view that inflation will drop and come in below its 2 percent target in 2023 and 2024, making any interest rate hikes this year unlikely.  

The ECB's conundrum is that inflation has repeatedly surprised on the upside, forcing the central bank to revise up its quarterly inflation projections six consecutive times. The traditionally hawkish Bundesbank, by contrast, has warned repeatedly not to underestimate risks of inflation staying above target for longer.

The generally more hawkish policy positions created frequent tensions between the majority position on the ECB and Weidmann, who left the central bank after ten years at his own request for personal reasons.  

Still, Nagel tried to strike a tone of reassurance.

"The people in Germany rightly expect the Bundesbank to be an audible voice of the stability culture," Nagel said. "I can assure you: it will stay that way. We will confidently bring our expertise and convictions into the debates."...

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