“Price pressures could persist for longer” Interview with Wirtschaftswoche

The interview was conducted by Maja Brankovic, Malte Fischer and Christian Ramthun.

Mr Nagel, many Germans dream of home ownership. What would you advise them to do? To go out and buy a home now or rather wait a year and bet on interest rates falling? 

I see that you’re trying to draw me out immediately. But the last thing I do will be to give advice on property purchases and housing loans. 

But you could certainly say something about interest rates, couldn’t you? 

What I can tell you is that our property market has put a decade of exceptionally low interest rates behind it. Following that, lending rates for housing loans have skyrocketed over the past two years. These have now come back down somewhat. This reflects market expectations about the future development of key interest rates. 

Will the European Central Bank (ECB) cut its key interest rates at the next meeting in June? 

We on the ECB Governing Council have not committed ourselves. Over the next few weeks, we will analyse the incoming data closely and then decide. But a key interest rate cut in June has become more likely.

The ECB’s inflation target is 2%. At present, we are seeing an inflation rate of 2.4% in the euro area; excluding energy and food, it is even 2.9%.

Medium-term price developments are what we focus on in the ECB Governing Council. Inflation rates are currently falling. But there are risks. Given the tensions in the Middle East, oil prices are significantly higher than they were last year. Gas prices in Europe, on the other hand, are down substantially. Energy prices will remain a source of uncertainty. Wage developments are likewise fraught with imponderables. For the euro area, we currently expect wages to rise by 4.5% this year. If wages rise more sharply than expected, price pressures could persist for longer, especially for services. It is therefore not yet entirely clear whether the inflation rate will return to the target of 2% next year and then remain at that level. 

In the United States, the inflation rate recently rose again. An interest rate cut there has become an even more distant prospect. Do you fear something similar occurring in the euro area? 

We on the ECB Governing Council are responsible for price developments in the euro area. If prices and the economy develop as expected, I would be in favour of cutting the key interest rates in June. However, the latest US data serve as a reminder inflation will not simply return to target by itself. The ECB Governing Council was therefore correct not to commit to a rate cut in June.

If the ECB lowers its key interest rates and the Fed keeps its policy rate high for longer, the US dollar could rise. Euro area countries would have to pay more for imports. Could that refuel inflation? 

We do not know what the Fed will do. We make our own decisions. It is clear that there are always feedback effects from the United States that are felt by the euro area. We will, of course, take those into account. However, the exchange rate is just one of many factors that influence inflation.

ECB Executive Board member Isabel Schnabel recently pointed out that the natural rate of interest, at which economic growth is smooth and non-inflationary, could be higher than previously assumed. Does this mean that the ECB will not push interest rates back down to 0%? 

The natural rate of interest is something that researchers have been studying for many years. The range of estimates is enormous and changes over time. Because of that, I do not find estimates of the natural rate of interest particularly helpful in terms of aligning monetary policy with it at present. However, it does provide a conceptual orientation for the long-term path of monetary policy. For example, the green transformation of the economy and global trade tensions could cause the natural rate of interest to rise over the years to come. That is just one reason why I think the ECB is unlikely to push its key interest rates back down to 0% any time soon.

Economic developments in Germany have been very weak recently. Are we once again “the sick man of Europe” as at the turn of the millennium? 

Most certainly not. At that time, unemployment was much higher, and corporate profitability was considerably worse. At present, initial signs are emerging that the German economy will revive over the course of the year. The latest output figures suggest that the first quarter of 2024 already turned out somewhat better than expected. And if we look at the common indicators, business sentiment has improved significantly.

What exactly do you expect?

Following a contraction of 0.3% in the fourth quarter of 2023, I am currently expecting slight growth overall for 2024. 

In other words, everything will then be “hunky-dory” in Germany as a business location? 

No, Germany is suffering from structural obstacles to growth. When I talk to entrepreneurs, I very often hear two factors that are making their lives difficult: reams of red tape and high taxes. The Federal Government has recognised these problems. Proposals by Federal Minister of Finance Christian Lindner and Federal Minister of Economic Affairs Robert Habeck are on the table. Finding solutions in a timely manner will be important here. 

We have been talking about this for years. Do you still hold out any hope?

We can change things – with courage and conviction. Take an example from the Bundesbank: after what we experienced in the pandemic, the way our work is organised is now much more flexible. Our employees are now working in a much more mobile and agile fashion. This means less need for office space. That’s why we are getting rid of relics of the past such as entitlement to a single-occupancy office – irrespective of duties. Offices can now be used more flexibly – think desk sharing. Naturally, not everyone is happy about this for now. But we can save on office space and costs this way. 

Germany has always been an anchor of stability for Europe ...

.... and it is important that Germany remains an anchor of stability in Europe! 

And you are nonetheless making a case for a reform of the debt brake? 

That is not at all a contradiction in terms. The Bundesbank is firmly on the side of a reliable, binding debt brake. However, we can envisage it undergoing a stability-oriented reform. One in which the focus remains on sound government finances. At the same time, we regard a moderate increase in discretionary scope as justifiable – under very specific conditions.

Such as?

If Germany’s government debt falls below 60% of gross domestic product, this will meet an important European stability criterion. This could permit greater net borrowing for the government than before, such as a deficit ratio of between one and one-and-a-half percent. That would probably also be compatible with the new EU rules. And the additional discretionary scope could be reserved for investment to strengthen the forces of growth and improve conditions as a business hub. 

Would such a reform benefit the “traffic light” coalition?

No, the general government debt level is currently still over 63%. Such a reform should not serve as a means to plaster over acute financing problems, either; it should instead enhance the budgetary rules in a future-proof manner. And I would like to emphasise this: the debt brake is not a brake on public investment. We must first use the funds made available. This is because, to a degree, existing funds have simply not been drawn upon because of roadblocks elsewhere. Such as bureaucracy.

In your proposals for reform, are you thinking of the period from 2028 when the Armed Forces Fund will be exhausted? A loose debt brake would certainly be helpful in that regard.

Our proposal has nothing to do with that. But it is true: in principle, federal government expenditure should also be funded out of its budget. The government and parliament must then decide on budgetary revenue and prioritise expenditure within the scope of the available resources.

Will the Federal Government then have to save on social spending?

It is up to politicians to discuss and decide on priorities. That is their task and their prerogative. 

We would also like to talk about gold …

By all means, the Bundesbank’s gold reserves are the second largest worldwide after those of the United States! We hold 3,353 tonnes. At the end of last year, they were worth just over €200 billion. 

In 2023, the Bundesbank recorded a loss in the billions. Why don’t you sell your gold to offset these? 

That is not on the table. Last year, we released our provisions for general risks and withdrew a substantial chunk from our reserves. We thereby offset losses of €21.6 billion. The losses are likely to gradually diminish over the coming years. They are mainly due to the fact that we have to pay higher interest rates on commercial banks’ deposits with the Bundesbank. At the same time, we still have large holdings of securities from the period of highly accommodative monetary policy, which earn us only a small amount of interest. We will carry forward future negative results on our balance sheet. But we will also make profits again later and use these to offset the loss carryforward. 

When will you resume transferring profits to the Federal Minister of Finance? 

Once we have offset the loss carryforward, we will initially replenish our provisions for general risks. I expect that it will be some time yet to come before we can resume distributing profits to the Federal Ministry of Finance. 

The Federal Court of Auditors has reportedly warned that the Federal Government might have to recapitalise the Bundesbank because of the losses. Do you take a similar view?

No, I do not share that view. Our balance sheet is sound, not least because of the gold holdings and revaluation reserves for them. We do not need to be recapitalised. 

Central banks’ losses are commercial banks’ profits. Why does the ECB not require commercial banks to hold higher minimum reserves? The central bank does not have to pay interest on that.

Some time ago, the ECB Governing Council lowered the reserve requirement ratio to one percent. I could also have imagined a larger non-interest-bearing minimum reserve again. However, in my view, this is not an instrument to take profits away from commercial banks, but to ensure that monetary policy is implemented as efficiently as possible. 

Your balance sheet is likely to grow again in the near future. The ECB has decided to hold bonds indefinitely in future and thereby lend commercial banks as much money as they wish. Why are you holding on to these crisis-era instruments? 

First of all, our balance sheet will shrink significantly for a longer period of time still. And quite rightly, too. In recent years, the financial markets have also changed. As a case in point, the regulatory framework conditions for the banking industry have evolved. For example, banks need to hold more liquidity. These changes will be reflected in the new monetary policy framework, and many details have not yet been finalised. Whenever the framework conditions change, we adapt our instruments. 

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