Bundesbank chief Nagel: Inflation still too high

Bundesbank President Joachim Nagel believes inflation in the Eurozone is still too high, despite a sharp decline in oil prices. He advised the European Central Bank (EZB) to stick to its current monetary policy path. "Inflation is still too high," Nagel told the "Frankfurter Allgemeine Zeitung" on the sidelines of the ECB's central bank forum in Sintra, Portugal.

The EZB had raised key interest rates for the first time in nearly three years in June to combat soaring inflation. Oil prices have fallen to pre-Iran war levels, with Brent crude dropping from a peak of around $120 per barrel to about $73. Nagel acknowledged the surprise many economists felt regarding the speed and extent of this price decrease, noting it was not anticipated even in the EZB's mildest scenarios. However, he stressed, "We should not completely overturn our inflation picture because of this."

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Inflation is still too high.

Looking at Germany, Nagel anticipates that the expiration of the fuel tax rebate at the end of June will push inflation higher. Nevertheless, he considers the decision to let the temporary tax cut expire to be correct. Inflation in Germany had climbed to 3.2% in May, well above the EZB's 2% target, due to the oil price shock. With falling oil prices, price pressures are easing, and German inflation unexpectedly dropped to 2.3% in June. While some economists speculate the EZB might hold rates steady in July, EZB board member Isabel Schnabel has indicated the possibility of further rate hikes. Nagel also observed that second-round effects from higher energy prices on other prices and wages have so far been minimal in Germany, though the likelihood increases the longer inflation stays above the EZB's target.

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We should not completely overturn our inflation picture because of this.