UK Markets close in 36 mins

ECB could still need big rate hike beyond March, Nagel says

FILE PHOTO: European flags are seen in front of the ECB building, in Frankfurt

(Reuters) - The European Central Bank may still need to raise interest rates significantly beyond March as inflation, particularly underlying price growth, remains too high, Bundesbank President Joachim Nagel said on Friday.

Although headline inflation is well below its peak, underlying price growth, a key indicator of the durability of inflation, rose to a record high 5.3% last month, raising the risk that price growth will get stuck above the ECB's 2% target.

"It appears that core inflation will remain at very high levels beyond March and only decline slowly," Nagel told a news conference in the Indian city of Bengaluru on the sidelines of a G20 finance meeting.

"That's why I'm not ruling out that further interest rate hikes, significant interest rate hikes, beyond March, may be necessary."

The ECB has already promised to raise rates by 50 basis points to 3% in March and markets now price another 75 basis points of moves before the end of the summer.

But dovish policymakers, particularly from the 20-nation euro zone's south, are pushing back, calling for more measured steps, arguing that rates are now restricting economic growth.

Disputing that point, Nagel said he did not think rate were restrictive yet, despite the steepest monetary tightening cycle in the ECB's history.

A neutral rate, which neither stimulates nor slows growth, can only be estimated and while most policymakers in the past put it at between 1% and 2%, many are now saying that the economy's behaviour suggests it is actually higher.

Nagel said that stopping monetary tightening too early would be a "cardinal error", a point echoed by other conservative policymakers, who say that the risk of doing too little to combat inflation outweighed the cost of doing too much.

(Reporting by Francesco Canepa; writing by Balazs Koranyi; Editing by Alex Richardson, Robert Birsel)