By André Stahl, dpa l Tuesday, December 20, 2022
BERLIN – It will take some time for inflation rates to drop to the 2% target set by the European Central Bank (ECB), says the president of Germany’s central bank.
Joachim Nagel told broadcaster RTL/ntv that he expected inflation rates to drop in Germany in December due to the gas price cap introduced by the government.
In November, inflation in Europe’s biggest economy stood at 10%, the Federal Statistical Office (Destatis) confirmed last week. In 2023, annual inflation would ease to 7%, before dropping significantly from 2024, the central bank president predicted.
It takes between 18 months and two years for the effect of interest rate hikes to make itself felt, Nagel said. “That’s why I have to ask for patience at this point.”
His remarks were backed up later on Tuesday by a forecast from the Halle Institute for Economic Research (IWH), which said it does not expect a deep recession despite the energy crisis and rising interest rates.
It says there should be a weak phase in the coming winter, but it will be moderate because of energy price controls being implemented to protect consumers. However, it said gross domestic product in 2023 could very well stagnate after this year’s 1.8% growth.
Consumer price inflation should also slow down, it said. After hitting 7.8% this year, it could slow down to 6.5% in 2023.
Battling to reduce inflation in the eurozone, the ECB hiked its main interest rate by 0.5 percentage points to 2.5% last week, the fourth rise in a row.
The key interest rate in the euro currency area had been frozen at a record low of 0% for years, but rapidly rising consumer prices this year – driven by higher energy costs in the wake of the Russian invasion of Ukraine – led the ECB to change its policy, with rates first rising in July.
In its latest forecast, the central bank expects inflation in the eurozone to average 8.4% in 2022. Next year, the ECB expects annual inflation of 6.3%, followed by a further drop to 3.4% in 2024.
While higher interest rates are the ECB’s main tool to fight inflation, they are also a burden for the economy. For example, higher interest rates can make loans to businesses and private individuals more expensive to repay.