FRANKFURT (Reuters) – Significant rate hikes by the European Central Bank (ECB) may be needed beyond March and the Frankfurt institution will have to accelerate the reduction of its bond portfolio in order to combat persistent inflation, a declared Wednesday Joachim Nagel, the president of the Bundesbank.

While the ECB has raised rates by 300 basis points since July and hinted that a further 50 basis point hike would take place this month, some officials within the institution are arguing for more measured action beyond March, judging inflation now well below its October peak.

Joachim Nagel, also a member of the ECB, believes, however, that the recent cuts in energy prices may have an impact on inflation in the short term but that they are insufficient in the medium term, which could lead to a maintenance sustained price rise above the Frankfurt institution’s 2% target.

“The interest rate hike announced for March will not be the last,” Nagel said. “Significant further interest rate action may even be needed later,” he added.

Markets are currently pricing in an ECB deposit rate of around 4% towards the end of the year, down from 2.5% today, suggesting a further 100 basis point hike after March.

According to Joachim Nagel, once the rates have reached their peak, they will have to be maintained at this level until the ECB is convinced that inflation will return to 2%.

“That must also be reflected in underlying inflation. Until that is the case, interest rate cuts are not an option,” he said.

The President of the Bundesbank also believes that the ECB, which has started to reduce its asset purchase program by 3,300 billion euros, will have to accelerate the pace from July.

The European Central Bank is currently reducing this program by 15 billion euros per month by not reinvesting all maturing bonds. Joachim Nagel, however, considers this pace too low.

“I therefore favor a more marked reduction from July, in the light of the experience gained so far,” he said.

Inflation in Germany could still average between 6% and 7% in 2023 and headline and underlying inflation could remain “well above” the 2% target in 2024 and 2025, warned Joachim Nagel.

At the same time, growth in Germany’s gross domestic product (GDP) is slipping and could even contract over the year as a whole.

“Although a gradual recovery is possible in the second quarter, there are still no signs of major improvement at the moment,” said Joachim Nagel.

“Our experts do not expect a visible economic recovery before the second half of this year,” he added.

(Report Balazs Koranyi; Claude Chendjou, edited by Kate Entringer)

Copyright © 2023 Thomson Reuters