Germany’s central bank chief has warned that interest rates must continue to rise despite the risk of a recession as inflation hits double digits for the first time since 1951.
Bundesbank president Joachim Nagel told the Rheinische Post that the recent surge in energy prices driven by Russian pressure on gas supplies is likely to push German inflation above 10 percent this fall and keep it high next year.
“The inflation problem will not go away in 2023,” Nagel said. “Supply bottlenecks and geopolitical tensions are likely to persist. Meanwhile, Russia has drastically reduced its gas supply and natural gas and electricity prices have risen more than expected.”
He added that “inflation is more likely to be higher than previously forecast and we will have an average of six to the decimal point next year,” pointing out that this is the 2023 inflation forecast of 4.5 percent set by the Bundesbank. in June.
Economists have lowered their estimates for growth in Germany and the eurozone this year, while raising their inflation forecasts and warning that a shutdown of Russia’s energy supply would force Berlin to ration gas for heavy industrial users.
Moscow added pressure on energy prices on Friday by announcing that it would close the Nord Stream 1 pipeline – the main gas pipeline to Europe – for three days to make repairs at the end of the month after inventories depleted. already had been reduced to 20 percent of capacity.
German electricity prices have reached a new record, seven times higher than a year ago – driven by sharply higher gas costs, which have increased tenfold over the past year.
Prices charged by German industrial producers rose by 37.2 percent in the year to July, which was the highest increase ever, according to the Federal Statistical Office. On a monthly basis, the producer price index rose by a record 5.3 percent, mainly due to energy costs.
A heat wave and dry spell have lowered water levels on the Rhine below the level at which barges can be fully loaded, limiting supplies to factories, which economists warn will also erode German growth this year.
“If there are still supply problems, for example due to prolonged low water [levels], the economic outlook for the second half of the year would deteriorate further,” said Nagel. “As the energy crisis deepens, a recession looks likely next winter.”
He said the European Central Bank, where he is one of 25 members of the board that sets interest rates, should continue to raise interest rates during its September 8 meeting. last month that the deposit rate was raised to zero.
“With the high inflation rates, further rate hikes should follow,” he said. “That is also widely expected. But I don’t want to put a number in the window.”
However, he said there was little sign of a wage-price spiral in the 1970s, adding that unions “have acted very responsibly over the past 25 years – they will do the same this time, I’m confident.”
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 percent, the largest cut of any country.
The German government announced plans on Thursday to lower the VAT on gas sales from 19 percent to 7 percent from October to soften the blow of higher prices for households. But major industrial users of gas, such as chemical companies, complained that this would not help them with rising energy bills.
German inflation rose 8.5 percent last month to nearly a 40-year high.
Several of the previous measures Berlin launched in June to tackle the country’s energy crisis, such as a fuel tax cut and a €9 a month subsidized train ticket, expire next month, which will increase the burden on households and businesses. .
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