German Central Bank Chief Warns ECB Must Act if Energy Costs Push Up Inflation

Investing.com – German Central Bank President Joachim Nagel said on Friday that a sharp rise in energy costs could trigger broader inflation in Europe. If this “second-round effect” becomes apparent, the European Central Bank must tighten policy.

The ECB kept interest rates unchanged on Thursday but raised inflation forecasts and warned of increased price risks stemming from the US and Israel’s war with Iran, which has fueled bets on at least two rate hikes this year.

Nagel did not explicitly support rate hikes but warned that the greater the rise in inflation and the longer inflation expectations remain above target, the more likely dangerous second-round effects will occur.

“Monetary policy cannot prevent short-term inflation increases caused by energy price shocks,” Nagel said in a speech. “However, when second-round effects become evident and long-term inflation expectations rise above the inflation target, monetary policy must act, as high inflation could become entrenched.”

An anonymous policymaker said that if the war continues, discussions on rate hikes would be needed in April, although the likelihood of action in June appears higher at the moment.

Nagel believes that the medium-term consequences of soaring inflation are still uncertain, so a wait-and-see approach is appropriate, especially considering that the ECB can respond quickly if necessary.

“We are committed to keeping inflation at 2% in the medium term,” he said. “Maintaining high alertness in monetary policy is crucial.”

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