Extra measures needed to curb rising expectations of future prices: ECB official

European Central Bank (ECB) Governing Council member Joachim Nagel said additional measures are needed to curb rising expectations of future prices and return inflation to the 2% goal.
“Our monthly surveys of firms and households are showing a significant increase in long-term inflation expectations,” Nagel said in an interview with the Zeitschrift für das gesamte Kreditwesen published on the Bundesbank website yesterday. “I firmly believe that we need to take further monetary policy action to halt and reverse this trend.”
The ECB raised interest rates by 250 basis-points last year and officials have said more hikes are to come. President Christine Lagarde said last week that allowing inflation to become entrenched “would be even worse.”
Nagel echoed that sentiment, saying it would be wrong to act too hesitantly now out of fear that higher borrowing costs could hurt economic growth.
“Then we would be forced to tighten policy all the more sharply further down the line, thus placing even more of a strain on the economy,” Nagel said. Nagel also said: “I am optimistic that Germany will be able to avoid a severe economic slump and we will get off lightly with a mild downturn. And I am confident that we will be able to tame the high rate of inflation over the medium term”.
“There is a distinct risk of stronger second-round effects because the higher wage deals that are being reached could prolong the prevailing period of high inflation rates”.
Meanwhile, Deutsche Bank AG confirmed it faces a higher capital requirement as its main regulator pushes lenders to dial back the risks they face in the lucrative business of leveraged finance.
The German lender must hold common equity Tier 1 capital equivalent to 10.55% of its risk-weighted assets this year, up from 10.43% at the end of September, it said in a statement on Friday after market close. The firm already exceeds the requirement by a wide margin, with a ratio of 13.33% at the end of the third quarter.
“The increase is driven by the ECB’s newly introduced separate assessment of risks stemming from leveraged finance activities,” Deutsche Bank said.
Bloomberg reported in November that the German bank and BNP Paribas SA were among lenders facing rising capital charges related to leveraged loans.
The ECB has said some lenders aren’t properly grasping the risks they face in that business, which involves financing highly-indebted companies, such as those acquired by private equity firms. Deutsche Bank chief executive officer Christian Sewing has pushed back, saying his firm doesn’t need warnings from its regulator to contain the risk it faces in leveraged loans.