European Central Bank (ECB) policymaker Joachim Nagel stated on Monday that the current policy rate is appropriate, anticipating inflation will stabilise at the 2% target after a temporary decrease. Nagel’s comments come after the ECB unanimously decided to maintain the main interest rate unchanged at 2% last week. Some policymakers have expressed concern that the recent drop to 1.7% might lead to an overreaction from the central bank.
Nagel, who is also the Bundesbank President, said the ECB would only intervene if medium-term inflation expectations diverged “sustainably and noticeably” from the target, which he believes is not the current situation. He supported his view by noting that the inflation shortfall is expected to be short-term and minor, with medium-term inflation aligning with the ECB’s target. Furthermore, long-term inflation expectations are considered “firmly anchored.”
Nagel pointed to measures of core prices, which exclude volatile elements like energy and food, as well as the ECB’s updated December projections, as further support for his stance. Recent data indicated that the January inflation decrease was primarily driven by lower energy costs, with services also experiencing a moderation in price increases.
Nagel concluded that temporary and small deviations, especially in volatile components such as energy prices, do not necessitate a change in policy if inflation expectations remain stable. This principle applies both when the inflation target is at risk of being undershot and when there is a risk of inflation exceeding the target.
