Nagel: We shouldn’t delay rate hikes because of recession fears

The European Central Bank must act decisively to contain inflation, Bundesbank chief Joachim Nagel said on Tuesday, following other officials who have called for a big rate hike next week, Reuters reports.

The ECB raised interest rates by 50 basis points last month, and the only real question heading into September seems to be whether the bank should raise rates by 50 or 75 basis points.

While Nagel did not comment on the exact size of the increase, he argued that the central bank should take decisive action and highlighted the benefits of front-loaded rate hikes.

“Monetary policy needs to react decisively in order to maintain the credibility of the inflation target,” Nagel said. “Evidence from several countries shows that front-loading increases reduce the risk of a painful economic downturn.”

Many policymakers have already said a 75 basis point hike should be on the table, while others, including Executive Committee member Isabel Schnabel and France’s central bank chief Francois Villeroy de Galhau, called for “strong ” or “significant” action.

“In my view, a bigger rate hike reduces the risk of inflation expectations running out of control,” Nagel said.

Eurozone inflation is expected to hit 9% this month and a further rise above 10% is likely as a rally in energy prices raises the risk of even higher prices.

Nagel rejected arguments that a recession is becoming increasingly likely in the coming months due to high energy prices and this should slow the ECB down.

“We should not further delay rate hikes because of the fear of a possible recession,” he said. “Inflation rates will not return to the central bank’s target on their own.”