Germany’s Finance Minister
warned that a weak euro might be driving up inflation in Europe and encouraged the European Central Bank to increase interest rates, an unusual step that underlines the growing concerns in Europe’s largest economy about the rapid pace of price increases.
The euro has fallen close to parity against the dollar in recent weeks and is currently trading at around $1.05, down from about $1.22 a year ago. That partly reflects the relative weakness of the eurozone economy, which has been squeezed by surging energy prices, as well as the anticipation of further interest-rate increases by the Federal Reserve.
The ECB, which faces a possible recession in Europe due to the economic fallout from the war in Ukraine, hasn’t increased its key interest rate, which still stands at minus 0.5%, even though the region’s inflation rate surged to 7.4% in April.
In Europe, “inflation risks emerge from the development of the external value of the euro, especially in view of central bank policy in the U.S.,” Mr. Lindner told a news conference on Friday following a two-day meeting with finance ministers of the Group of Seven major advanced economies.
“Inflation is a major risk for future economic development and in particular for the economic progress that we need” for our people, he added. Inflation in Germany rose to 7.4% in April, the highest level since 1981, according to the federal statistics agency.
German central-bank governor
who sits on the ECB’s rate-setting committee, said at the same news conference that he expected the ECB to increase interest rates in July, and that further increases could follow. He also didn’t rule out a 0.5 percentage point rate increase—larger than the 0.25 percentage point increase that economists currently expect.
German central-bank governor Joachim Nagel said Friday he expects the ECB to increase interest rates in July.
“We need to take decisive action. … Negative interest rates are a thing of the past,” Mr. Nagel said. “When you’re in an inflation environment around 7% … I think the conclusive decision out of that is that interest rates, they have to go up.”
Mr. Lindner said he welcomed such a move. “I fully endorse … that an interest rate step has been announced [by Mr. Nagel] and more steps will quickly follow, I endorse this and I consider this to be important,” he said.
Germany has a strong tradition of central-bank independence, under which the government rarely comments on central-bank policy.
Top ECB officials, including President
have signaled an imminent shift away from easy-money policies as inflation continues higher than expected.
The ECB is expected to phase out its large-scale government bond purchases next month, which would lay the groundwork for an interest-rate increase as soon as its policy meeting on July 21. With European businesses and households struggling with rampant inflation, softening confidence and supply-chain blockages, it isn’t clear how high interest rates will rise after that.
Mr. Lindner also called for an end to large-scale government spending programs and cautioned against a rollout of government subsidies, which are being used in some places to cushion the impact of higher energy and food prices.
“This is not the time for … increasing public demand and subsidies,” he said. “We need to reduce our deficits, we need to stop vast expenditure programs,” he said.
Economists expect the German government to register one of its highest budget deficits on record this year, in part because of a series of subsidies aimed at supporting consumers amid rising energy prices.
Mr. Lindner also confirmed that the G-7 ministers had pledged to disburse about $20 billion in fresh emergency funding for Ukraine, including about $9.5 billion that was committed in recent days. Germany said this week it would give Ukraine $1 billion while the U.S. plans to deliver $7.5 billion in short-term funding, officials said.
Ukraine “needs liquidity, they need money because they must not be restricted in their ability to defend themselves against Russia,” Mr. Lindner said.
Write to Tom Fairless at firstname.lastname@example.org
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
The Insidexpress is now on Telegram and Google News. Join us on Telegram and Google News, and stay updated.