ELILLE AM RHEIN (Germany) -The European Central Bank should increase interest rates in July to prevent high inflation from becoming entrenched. This was Joachim Nagel, chief of the German Bundesbank, who joined a long list policymakers calling for rapid rate increases.

As inflation soared to a record-breaking 7.5% in 19 countries of the euro currency area last month, policymakers increasingly advocate a quick unwinding and many, including Isabel Schnabel who is an ECB board Member, are calling for a rate rise in July.

Nagel, a recent addition to the ECB Governing Council said the ECB should stop bond purchases at June’s end and raise the deposit rate at its next meeting. He also downplayed concerns over rising borrowing costs indebted nations.

“If both the incoming data and our new projection confirm this view in June, I will advocate a first step (towards) normalising ECB interest rates in July,” Nagel said in a speech at a conference hosted by the Bundesbank.

After eight years in negative territory and a record low -1.5%, a July rise to the ECB’s deposit rate would mark a significant turnaround.

Just months ago, the bank had said such a move was highly unlikely. But now, many, including Francois Villeroy De Galhau (French central bank chief), are calling for rate increases to positive territory in this year’s fiscal year. It would require at least three 25-basis-point increases.

Financial markets have seen a shift in expectations, as bond yields are rising across the board for all nations and particularly Italy.

The ECB has been discussing the possibility of creating a new instrument to reduce the gap between interest rates paid by weaker borrowers versus safe-haven Germany.

Nagel however stated there was no hurry to act and said the ECB should focus now on inflation.

In response to questions from the audience, he stated that bond spreads would be an indicator we will look into in the near future. But today I don’t think we should deal with this through a special instrument.

He stated that swift ECB action is necessary as a delay will force the bank’s abrupt response later.

The risk of not acting quickly is growing. A very sharp and sudden interest rate increase is necessary as inflationary pressures rise.

Nagel noted that although inflation is driven primarily by high energy prices, there is evidence to suggest that price growth may be gaining momentum.

Although wages may not be yet responding, major wage negotiations will not take place in Germany until the second half year. Some demands, however, have already been very high.

According to Nagel’s survey of businesses and households, inflation expectations are rising as well.

“All of this suggests that high inflation rates will prevail soon and that inflation expectations may become less anchored,” said he.