Bundesbank (Germany's central bank) head, and thus a key member of the European Central Bank Governing Council, Joakim Nagel in a speech, report via Reuters overnight:
- "Decisive monetary policy action is necessary to reduce the risk of an unanchoring of long-term inflation expectations"
Also said that halting rate hikes too soon would be a sin.
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Data show that forecasts by analysts and investors for inflation in the euro area from 2025 forwards are at or just over 2%. That is, at present these are anchored.
Nagel is a hawk (the Buba head usually is!) and he wants to keep inflation expectations anchored like this.
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For background on anchoring, I wrote this earlier:
A concern for central banks is to keep inflation expectations anchored. In a nutshell:
- The argument is that inflation expectations can become self-fulfilling. For example during times of increasing inflation - people see inflation rising so they tend to buy more quickly, thus prompting prices to rise faster. People expect faster inflation (i.e. its 'unanchored' ... rising quickly)
- On the flipside, if inflation is either very low or in deflation (i.e. general falling prices), people hold off purchasing 'cause there is no rush if prices are falling, and again the argument is this behaviour can feed on itself and grow as a problem. People expect falling prices to fall harder ('unanchored').
The RBA has a much, much more detailed look at inflation expectations and in particular its impact on fixed interest markets, link here. Even just checking out the introduction to the paper gives good information.
