'ECB Must Keep Raising Rates Even If Recession Comes'

The European Central Bank must keep raising interest rates even if a recession in Germany is increasingly likely, as inflation will stay uncomfortably high all through 2023, Bundesbank President Joachim Nagel has told a German newspaper.

The ECB raised interest rates by an unexpectedly large 50 basis points to zero percent last month and promised more rate hikes to come, arguing that fears over excessive inflation now trump growth concerns.

The inflation outlook has deteriorated further, however, and price growth in Germany, the eurozone's biggest economy, could even exceed 10 percent in the coming months, Rheinischen Post quoted Nagel as saying on Saturday.

"The probability is rising that inflation will be higher than previously forecast and will average six point something next year," Nagel said, indicating a big upside risk to the Bundesbank's previous projection of 4.5 percent for 2023.

The ECB is forecasting a rapid decline in price growth next year but its projections have been notoriously inaccurate in recent quarters, leading policymakers to question the bank's models, which are not well equipped to factor in dramatic shifts in the economy.

Nagel also acknowledged that the German economy, among the most exposed to disruptions in Russian gas supply, is "likely" to suffer a recession over the winter if the energy crisis continues to deepen.

Still, the ECB should not hesitate to raise rates, Nagel said, adding that he fully supported the July move.

"With the high inflation rates, further interest rate hikes must follow," Nagel said, though he declined to discuss the size of the September move.

Markets currently price in a 60 basis point hike for September and a combined 130 basis points of moves for the remainder of the year. (Reuters)