Nagel says inflation risks still tilt to the upside
The Bundesbank chief's hawkish tone comes days after eurozone inflation jumped to 3.8% in September
Published
Bundesbank President Joachim Nagel said upward risks to the inflation outlook dominate, and that uncertainty calls for flexibility rather than inaction. He added there are so far no clear signs that inflation has fed through to price and wage setting. Nagel also said Germany has entered a gradual recovery.
His remarks come after eurozone headline inflation jumped to 3.8% in September, above forecasts, while core inflation held at 2.5%.
The comments mark a departure from the recent tone among other ECB policymakers. Governing Council members Gabriel Makhlouf and Peter Kazimir had flagged no clear second-round effects from inflation and stressed flexibility over urgency. ECB President Christine Lagarde has said rising long-term rates will slow euro area growth, a view that pushed traders to cut bets on an October rate rise to under 40%. Olli Rehn has also taken a more dovish line, arguing that rising long-term rates are already doing the central bank's tightening work for it.
The divergence lands at a sensitive moment for German bond markets. The German 10-year yield slid 10 basis points on Friday to a three-week low of 3.41%, after climbing as high as 3.61% in September on fiscal expansion worries, weak auction demand and hotter-than-expected inflation and import price data. Nagel's emphasis on upside inflation risk reopens the question of whether that pullback in yields holds, or whether firmer German data pushes long-dated yields back up.