On Tuesday (May 7) local time, Joachim Nagel, member of the governing committee of the European Central Bank and president of the German Central Bank, said that the euro area would not return to the era of ultra-low inflation before the COVID-19 epidemic, and geopolitical, decarbonization and other factors might keep inflation in the euro area at a high level in the next few years.
"A series of potential factors may lead to increased inflationary pressure in the future," Nagel said at a meeting on Tuesday. He also mentioned that the continued trend of declining population in Europe may lead to sustained wage increases.
Before the outbreak of the COVID-19, the euro area had been at an extremely low inflation level for a long time. From 2013 to 2019, the average inflation rate of the euro area was only 1%, only half of the ECB's target inflation level of 2%, which also made the central bank maintain a long-term negative interest rate policy.
However, after the outbreak of the COVID-19, inflation in the euro area began to soar in 2021. The following year, affected by the overall escalation of the Russia-Ukraine conflict, the inflation rate once reached a record 10.6%.
In order to curb high inflation, the European Central Bank ended an eight year period of negative interest rates in July 2022 and began the fastest rate hike cycle in history, raising interest rates 10 times in a row, totaling 450 basis points.
The last time the European Central Bank raised interest rates was in September last year, and it has remained stagnant since then. The three key interest rates are mainly refinancing rate, marginal lending rate, and deposit mechanism rate, which are 4.50%, 4.75%, and 4.00%, respectively.
Although the inflation rate in the Eurozone has significantly fallen to a level of 2.4%, there are differing opinions on which is more risky for future inflation to be too high or too low.
Nagel expects that the eurozone will not return to the low inflation rate before the pandemic, but he also stated that more research is needed on this.
He said, "Looking ahead, do we need to be prepared to return to the low inflation world we have been accustomed to in the past decade? I don't think so."
Nagel said that under the combined action of structural driving factors, monetary policy may reach a certain equilibrium point, where the inflation rate is about 2%, the interest rate level is not too high, but a safe distance from the effective lower limit is maintained.
However, Nagel also warned that if price pressures rise again in the medium term, decision-makers need to take action.
He said, "Even if we temporarily adapt to higher inflation rates, there is a risk of inflation expectations losing anchor. We should not let this risk become a reality."