FRANKFURT: Monetary policy in the eurozone needs to “be on its guard” in the face of record inflation, new Bundesbank President Joachim Nagel said yesterday, placing himself in the institution’s hawkish tradition.

“The risk right now is that inflation rates stay elevated for longer than currently expected,” Nagel said at an event to mark the handover from his inflation-wary predecessor Jens Weidmann. “In any case, monetary policy must be on its guard,” said Nagel, who has spent 17 years at the Bundesbank, widely trusted in Germany for its commitment to economic stability.

As a member of the European Central Bank’s governing council, Nagel will be tasked with formulating the bank’s response to soaring inflation in the eurozone, which stood at five percent in December, its highest-ever level and well above the ECB’s two-percent target. At its last meeting in December, the 25-member policy-setting committee decided on a “step-by-step” reduction in the ECB’s massive bond-buying programme, its main crisis-fighting tool.

But concern has grown that the fast pace of price rises could persist as supply bottlenecks that have driven inflation show no sign of easing and geopolitical conflicts threaten to push energy costs higher. “We have a playbook for how to react when inflation deviates from our target in both directions,” ECB president Christine Lagarde said at the Bundesbank event.

Both based in Frankfurt, the ECB and the Bundesbank have often been at odds over the right course of action, with the German institution advocating a less accommodative response to recent crises. In the context of uncertainty, the ECB should “follow its primary target of price stability without compromise, and in particular without consideration for the financing costs of states,” outgoing Bundesbank chief Weidmann said.

High levels of government indebtedness, which have only gone up during the pandemic, were a “big risk for monetary policy”, Weidmann said. Nagel would follow the “Bundesbank’s line up to this point” he said, stressing the need for the ECB’s expansive monetary policy not to continue “for too long”. —AFP