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The European Central Bank should continue increasing rates, according to Bundesbank Chief Joachim Nagel, who warned that Germany faces a recession if the energy situation escalates.

“Given high inflation, further interest-rate hikes must follow,” Nagel told Rheinische Post in an interview, declining to put a number on what he expects for the next decision in September. “The past few months have shown that we have to decide on monetary policy from meeting to meeting.”

The ECB last month raised rates by 50 basis points and indicated it plans to increase borrowing costs again. Subsequent data have shown inflation just shy of 9%, more than four times the central bank’s target. 

“It will be crucial to keep medium-term inflation expectations stable at 2%,” said Nagel, who will be attending the the Federal Reserve’s Economic Policy Symposium in Jackson Hole, Wyoming, next week. “I am convinced that the Governing Council of the ECB will take the necessary monetary-policy measures.”

The economic prospects for the euro area haven’t made the situation any easier, with a recession looking increasingly likely, causing some analysts to temper their forecasts for ECB rate hikes. 

Germany’s outlook is particularly dire: the country’s dependence on Russian gas leaves it more vulnerable to the war in Ukraine, while a recent dry spell has made the Rhine River -- vital for the transport of fuel and other industrial goods -- difficult to navigate.

“If the energy crisis worsens, a recession seems likely next winter,” said Nagel. “The German economy still performed quite well under difficult conditions in the first half of the year. However, if further delivery problems are added, for example due to prolonged low water levels, the economic prospects for the second half would deteriorate further.”

Inflation in Germany could hit 10% in the autumn months, Nagel said, citing the end of special items that lowered price gains like the 9-euro train ticket and a discount on petrol.

The Bundesbank chief urged workers to keep the economic situation in mind when negotiating wages. 

The fact that German inflation is largely driven by energy costs “means that we’ll have to spend more of our economic output on importing energy,” he said. Trade unions have “acted very responsibly over the past 25 years -- they will do the same this time, I’m confident of that.”

Nagel also told Rheinische Post:

  • The real estate boom is set to normalize
  • Some mortgage holders may struggle with rising interest rates, though he doesn’t predict an “avalanche-like development”
  • Banks are likely to stop charging negative rates by the end of the year

(Updates with German inflation rate in eighth paragraph)

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