EconomyGerman central bank chief Joachim Nagel warns inflation to...

German central bank chief Joachim Nagel warns inflation to hit 70-year high

Germany’s central bank chief has warned that interest rates need to keep rising 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 surge in energy prices caused by Russia’s squeeze on gas supplies was likely to drive German inflation above 10 per cent this autumn and keep it elevated next year.

“The issue of inflation will not go away in 2023,” said Nagel. “Supply bottlenecks and geopolitical tensions are likely to continue. Meanwhile, Russia has drastically reduced its gas supplies, 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”, pointing out that this would exceed the 2023 inflation forecast of 4.5 per cent made by the Bundesbank in June.

Economists have slashed their estimates for growth in Germany and the eurozone this year, while raising their inflation forecasts and warning that an end to Russian energy supplies would force Berlin to ration gas for heavy industrial users.

Moscow stepped up the pressure on energy prices on Friday by announcing it would shut the Nord Stream 1 pipeline — the main conduit for gas to Europe — for three days to do repairs at the end of the month, having already cut supplies to 20 per cent of capacity.

German electricity prices have hit a new record, seven times higher than a year ago — driven by the sharply higher cost of gas, which has risen 10-fold in the past year.

Prices charged by German industrial producers rose 37.2 per cent in the year to July, which the Federal Statistical Agency said was the highest increase ever. On a monthly basis, the producer price index rose by a record 5.3 per cent, mainly due to energy costs.

A heatwave and dry spell has reduced water levels on the Rhine below the level at which barges can be loaded fully, restricting supplies for factories, which economists are warning will also erode German growth this year.

“If further delivery problems are added, for example due to prolonged low water [levels], the economic prospects for the second half of the year would deteriorate further,” Nagel said. “As the energy crisis deepens, a recession appears likely next winter.”

He said the European Central Bank, where he is one of 25 members on its rate-setting governing council, would need to keep raising interest rates at its meeting on September 8. He did not say whether it would repeat the half percentage point rise of last month that lifted its deposit rate to zero.

“With the high inflation rates, further interest rate hikes must follow,” he said. “This is also generally expected. But I don’t want to put a number in the shop window.”

However, he said there were few signs of a 1970s wage-price spiral, adding that trade unions had “acted very responsibly over the past 25 years — they will do the same this time, I’m confident of that.”

The German economy stagnated in the second quarter, the weakest performance of the major eurozone countries. Last month, the IMF slashed its forecast for German growth next year by 1.9 percentage points to 0.8 per cent, the biggest downgrade of any country.

The German government announced plans on Thursday to cut value added tax on gas sales from 19 per cent to 7 per cent from October to soften the blow of higher prices for households. But large industrial users of gas, such as chemical companies, complained this would not help them with soaring energy bills.

German inflation last month rose close to a 40-year high of 8.5 per cent.

Several of the earlier measures launched by Berlin in June to tackle the country’s energy crisis — such as a cut in fuel duty and a subsidised €9 monthly train ticket — are due to expire next month, which will increase the burden for households and businesses.

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