The interview was conducted by Eva Quadbeck and Stefan Lange
Translation: Deutsche Bundesbank

Mr Nagel, inflation is now back up at 2.9 %. Are consumers in Germany going to have to get used to the idea that painful price increases are here to stay?

Inflation this year is going to be noticeably higher than we were expecting it to be before the war in the Middle East broke out. As a matter of fact, we succeeded in hitting our medium-term target – the December inflation rate in both Germany and the euro area as a whole came to 2.0 %, as measured by the Harmonised Index of Consumer Prices. And we were close to 2 % through till February. Then the war in the Middle East started. As things stand right now, I am expecting inflation to average around 2.7 % for the year. Under adverse circumstances, it could also be higher still. That mainly depends on how long the Strait of Hormuz remains blocked. That’s the global economy’s Achilles’ heel. Truth be told, that was already widely known before this war.

Yes, everyone knew that apart from US President Donald Trump – right?

The inability to pass through the Strait of Hormuz isn’t the only problem, though. The war has destroyed crude oil and natural gas production and processing facilities as well. It could take some time for refineries to get back to earlier output volumes. So we might well end up facing higher energy prices for some time yet, even if the Strait of Hormuz is reopened at some point. Higher insurance premiums for cargo vessels might push up prices as well, as insurers put a higher price on risks in the future. Those aren’t good prospects, especially for the general public.

The main question that comes to mind when inflation is high is: when are interest rates going to rise?

The ECB Governing Council decided after an intensive debate last week not to raise the key ECB interest rates. As usual, our latest projections from March considered market expectations for interest rates, and those included increases in interest rates during the current year. We are all hoping that the geopolitical situation calms down and that energy prices – that is, oil and gas prices, in particular – fall back again more sharply. But if the outlook doesn’t improve noticeably, I would expect us to raise interest rates in June.

What criteria does that depend on?

I look at a huge amount of data. One crucial factor for us on the Governing Council is the outlook for inflation, which Eurosystem staff update every three months. Another aspect we consider are the expectations of markets, consumers and firms. Needless to say, we also keep an eye on current inflation tendencies and on how the increased energy costs are impacting on other goods and services prices and on wages. If we conclude from that assessment that inflation is likely to rise significantly over the medium term, then it’s necessary for us to raise the key interest rates.

In the United States, we are seeing the Fed’s independence being called into question. Are enough safeguards in place to prevent that happening to the Bundesbank?

Yes, we’re well protected. The legal framework in place at both the national and European level means that the independence of euro area central banks is firmly anchored in institutional terms. That shields us from political influence. Though I could never have imagined that we would ever reach a point where the Fed’s independence was a topic of debate. I admire the Federal Reserve chairman who is still in office, Jerome Powell. In recent weeks, he has given a lesson in showing backbone and handling outside pressure.

Speaking of independence, significant amounts of Germany’s gold reserves are in storage in the United States. Given how unpredictable the US administration can be, shouldn’t that gold be brought to Germany?

37 % of our gold reserves are stored in the United States, 51 % are located here in Frankfurt am Main, and 12 % are in London with the Bank of England. So we have a fairly broad array of storage locations. I have no doubt that the gold at the New York Fed is in safe hands. Especially since it enjoys a special legal status. 

Didn’t you say just now that you could never have imagined a day where the US central bank comes under pressure ...

Yes, but the legal framework is different for global reserve assets. You can’t compare the two. The United States would end up harming itself the most if, in one way or another, it calls that legal status into question. That would be tantamount to gambling with the confidence of financial markets. I see no indications that anyone is thinking in that direction.

Let’s get back to Germany: the country’s stability would also get a boost if growth picked up again. What’s the first piece of homework Germany needs to do to give its economy a push?

We actually made a fairly good start to the year. Gross domestic product grew by 0.3 % in the first quarter. Before the war in the Middle East broke out, the Bundesbank was expecting GDP to expand by just over 0.5 % in calendar-adjusted terms for full-year 2026. If we extrapolate the current situation, we might still manage that, more or less, despite the headwinds from the conflict in the Middle East. That’s because developments up to March were better than expected. Despite the difficult situation, alongside threats of fresh tariffs from the United States, I am not expecting to see the German economy stagnate. 

Let’s get down to the nitty-gritty: what can Germany do to improve the situation it is in?

The country also needs to get to grips with the unpleasant topics, such as longer working lives. We need an answer to demographic developments. For some time now, I have been calling for the statutory retirement age to be brought into line with developments in life expectancy. 

The Federal Government has tabled the key aspects of a budget for 2027. What is your take on that?

Net borrowing of around €200 billion, including the special funds, is a sizeable number. At the Bundesbank, we think it’s crucial for Germany to get back to sound public finances after a transitional period – without any new borrowing in special funds and without any exceptions like that.

Is that also why you are proposing to reform the debt brake?

Yes, I believe we need to see reform here. As it currently stands, the debt brake no longer safeguards either sound public finances or the EU fiscal rules. A stability-oriented reform of the debt brake would navigate new borrowing back to the intended scope over the longer term. That includes, amongst other things, gradually getting back to a situation where defence spending is financed without new borrowing. 

Debt taken out today is calculated on the basis of Germany’s AAA rating, and that means moderate interest rates. Will we be able to retain that prime rating given the challenging economic environment?

Even if the debt ratio increases significantly in the coming years, it is still comparatively low, and Germany continues to be an anchor of stability in the European Union. That said, a top rating shouldn’t be taken for granted. It’s something you need to work for and defend by embracing a stability-oriented fiscal and economic policy. Capital markets trust Germany to keep its public finances sound. Reforming the debt brake in a suitable manner would shore up that trust.

But doesn’t that mean Germany needs to be more honest about analysing the situation it is in?

I do not want to classify matters as honest or dishonest at all. It’s the facts we need to look at. And what we can see, when it comes to productivity, is that Germany has been losing ground internationally for some time now. Productivity growth has more than halved. We are shedding jobs in industry and losing market share to global competitors. Our welfare systems are coming under intense pressure.

We don’t know of any country in Europe where cash still plays such a crucial role as it does in Germany. Does the digital euro even stand a chance in Germany, assuming it is introduced at all in 2028 or 2029?

Looking at the euro area, cash still plays a major role in the German-speaking countries in particular. The Bundesbank has never left any doubt about how much we value cash. We stand by cash. Up till now, cash has been the only European payment solution that lets you pay anywhere in the euro area.

You’re not exactly selling me the idea of the digital currency.

Hear me out. Because with the digital euro, we are creating the digital twin to cash. The digital euro will enable us to pay anywhere, all across the euro area – at the point of sale, online, or from one person to another. That matters in times where things are becoming ever more digital. Right now, US providers settle around two-thirds of all card payments in Europe. When it comes to critical infrastructure like payments, we cannot afford to be over-reliant on providers from outside Europe. That’s why we regard the digital euro as a matter of European autonomy.

When will it be rolled out?

I noticed just recently in Brussels how the initial resistance is easing significantly and how people are understanding what the digital euro means. That is why I am expecting the legal basis for the digital euro to be adopted at the European level before the end of this year. Then I might stand a good chance of being able to pay with the digital euro in 2029, while I am still in office.

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