Germany’s central bank chief has warned that interest rates must continue to rise despite the risk of recession as inflation reaches double-digit levels for the first time since 1951.
Bundesbank President Joachim Nagel told the Rheinische Post that the recent rise in energy prices caused by Russia’s pressure on gas supplies would likely push German inflation above 10% this autumn and keep it high next year
“The inflation problem is not going away in 2023,” Nagel said. “Supply bottlenecks and geopolitical tensions are likely to continue. Meanwhile, Russia has dramatically reduced its gas supply and natural gas and electricity prices have risen more than expected.”
He added that “the probability is growing that inflation will be higher than previously forecast and that we will have an average of six before the decimal point next year”, noting that this would exceed the 2023 inflation forecast of 4.5 percent made by the Bundesbank in June.
Economists cut their growth estimates in Germany and the euro zone this year, while raising their inflation forecasts and warning that an end to Russian energy supplies would force Berlin to ration gas for industrial users heavy
Moscow increased pressure on energy prices on Friday by announcing it would shut the Nord Stream 1 pipeline, the main gas pipeline to Europe, for three days for repairs at the end of the month, after cutting supplies to 20 percent of capacity
German electricity prices have hit a new record, seven times higher than a year ago, boosted by the cost of gas, which has increased 10-fold in the past year.
Prices charged by German industrial producers rose 37.2 percent in the year to July, which the Federal Statistics Agency said was the highest increase ever. In monthly terms, the producer price index rose a record 5.3 percent, mainly due to energy costs.
A heat wave and drought have reduced water levels in the Rhine below the level at which barges can be fully loaded, restricting supply to factories, which economists warn will also erode German growth this year.
“If more delivery problems are added, for example due to a prolonged lowering of water [levels]the economic outlook for the second half of the year would deteriorate further,” Nagel said. “As the energy crisis deepens, a recession next winter looks likely.”
He said the European Central Bank, where he is one of 25 members of its rate-setting governing council, should continue to raise interest rates at its September 8 meeting. It did not say whether it would repeat last month’s half-percentage-point hike that took its deposit rate to zero.
“With high inflation rates, further interest rate hikes must follow,” he said. “This is also expected in general. But I don’t want to put a number on the window”.
However, he said there was little sign of a wage-price spiral of the 1970s, adding that unions had “acted very responsibly over the last 25 years – they will do the same this time, I’m for sure”.
The German economy stagnated in the second quarter, the weakest performance of the major Eurozone countries. Last month, the IMF cut its forecast for German growth next year by 1.9 percentage points to 0.8%, the biggest cut of any country.
The German government announced plans on Thursday to cut value-added tax on gas sales from 19% to 7% from October to soften the blow of higher prices for households. But large industrial users of the gas, such as chemical companies, complained that this would not help them.
German inflation rose last month to near a 40-year high of 8.5%. Berlin is preparing more relief measures to help people with the rising cost of living, but Finance Minister Christian Lindner has ruled out extending the subsidized €9 monthly train ticket beyond this month. Lindner said at a public event at the weekend that the move would cost 14 billion euros a year, which could otherwise be spent elsewhere, such as education.
Several of the previous measures the government launched in June to tackle the energy crisis, including fuel tax cuts, will expire next month, adding to the burden on households and businesses.