“The stable labour market is a bright spot” Interview published in Stern and Capital+

The interview with Joachim Nagel was conducted by Nico Fried (Stern) and Timo Pache (Capital).
Translation: Deutsche Bundesbank

Mr Nagel, who does the shopping in your family?

We share shopping duties. I do the shopping on Saturday in any case, because I’m also the one who does most of the cooking over the weekend.

Then you’re also aware of food prices …

Yes, very much so.

At what point did you say to yourself, “My goodness, that’s expensive now”?

In spring, about the prices of eggs and butter. Last week, it struck me particularly with pasta, for example. A 500 gram pack was €1.49 before. And now it’s much higher, at €2 and sometimes more than that even.

Where does a central banker first notice that inflation is coming: in the reports given to them, or in the supermarket?

When I took office in January, the Bundesbank’s economists had already seen that inflation could be more stubborn. I myself only noticed the increased food prices after the war began on 24 February. And it was then also very noticeable at the petrol pump. Suddenly, prices had a 2 in front of them, and they went higher still.

For some time, inflation was played down. The message was that it would pass.

“Temporary” was practically a buzzword back then when it came to this.

Precisely. When did you know that this would be a longer-term problem?

From my time before the Bundesbank, I already had a clear idea: the pandemic subsided, and demand for goods outstripped supply. One reason for this was continued supply bottlenecks and lockdowns in China. I saw the risk that inflation might not actually be temporary after all. That’s why I decided to send a clear message in my inaugural speech.

That made your stance tougher than the ECB’s top brass. How did colleagues react?

Some may well have thought, “Oh, the new guy, he’s talking the Bundesbank talk, too”. I made the case for my position. And Russia’s war of aggression against Ukraine has changed a lot of things, including the inflation outlook. But above all, it is bringing so much suffering to the people of Ukraine.

In a situation like this, do central bankers also connect with each other straightaway?

Yes, of course. We had to discuss what this means for monetary policy. Plus the Bundesbank plays an important role in the implementation of financial sanctions. The G7 countries came to an agreement. It certainly was a dramatic and challenging time.

The relationship between your predecessor Jens Weidmann and then ECB President Mario Draghi was considered tense. Is everyone pulling together now?

To me, the here and now is what matters. I go my own way but also see myself as a team player. The events of 24 February brought the Governing Council of the ECB closer together. I believe that the Governing Council has shown strength this year. What would have happened if we had been dealing with 19 different currencies in this situation, instead of the euro? I don't even want to imagine it.

The public impression, however, was that it took the ECB quite a long time to move the interest rate lever in June.

It’s not just about interest rates. We responded earlier with other monetary policy instruments.


When the ECB Governing Council met in March, uncertainty was extremely high. It would also have made sense to say let's hang on and see how this extraordinary situation evolves and not do anything at all for the time being. However, we agreed to significantly reduce net asset purchases and to end them if necessary. We acted. For me, that meeting in March was the turning point.

The ECB’s inflation target is 2%. You’re a long way from achieving that. Don’t you have a guilty conscience?

A guilty conscience implies having done something wrong. I pointed to the risks. And there were events that couldn’t be foreseen. Hindsight is always 20/20. But, of course, we have to draw the right lessons from this.

Did you ever feel uneasy this year?

Uneasy, no. But, yes, I'd say there were moments when I thought, “My goodness, couldn’t we have been spared this?”

I’m sure many people thought that.

A friend of mine took in a family from Ukraine. I saw all the drama, the sorrow and the concerns facing people, up close and personal. It’s terrible. When I see that suffering, it affects me deeply. There’s more to life than monetary policy at moments like that.

Let's talk about it anyway. Is the fight against inflation making progress now? 

Yes. But we are still far from our objective. Inflation is stubborn – so we need to be more stubborn still.

A few weeks ago, you expressed the expectation of a “robust” interest rate step. Last week, the ECB raised interest rates by 0.5 percentage point. Is that robust enough?

Yes, in combination with the message we sent.

What do you mean by that?

When we raised interest rates by 0.75 percentage point in October, the market response was relatively subdued. This time, it was quite different, even though it was “only” 0.5 percentage point. Why? Because we made a strong statement for the future. And what is more, we have made a move to start reducing the asset holdings in central banks’ balance sheets.

And what is the interest rate statement?

It was a robust interest rate step. And it wasn’t the last. As things stand today, further robust steps need to follow.

What does that mean in practice for people who are struggling with high prices every day?

We will see a dampening effect from the gas price brake in December. The inflation rate could fall below 10%.

But once that one-off effect ends, inflation will initially pick up again in January and February. We expect the average annual inflation rate in Germany to be around 7% in 2023. It will then be significantly lower in 2024. Nevertheless, the road immediately ahead remains rocky. That is why we are resolutely maintaining our monetary policy stance. The good news is that this will allow us to restore price stability in the euro area.

When the inflation rate falls, it does not mean that prices fall, just that they're no longer rising as quickly.

That’s true. For us, price stability means aiming to achieve a low inflation rate, i.e. general price increases of 2% in the euro area in the medium term.

Inflation is a social problem because it affects lower-income households more severely, forcing them to spend a lot of money on daily necessities. As a member of the SPD, how do you feel about that?

(laughs) Party membership has nothing to do with it. I became a social democrat just over 20 years ago...

Because social issues are important to you?

Exactly. But that doesn’t mean that I believe social issues are not also important to the other parties. As Bundesbank president, I consider myself responsible for price stability. I feel the weight of that responsibility every day, as I interact with people from very different professions and life situations, for example in my circle of friends.

What do they say? Man, Joachim, get on with it, what are you at the Bundesbank for anyway?

They all have the same anxieties as everyone else, of course. They see it when they look in their wallets, when they make advance payments and when they have to extend their mortgages. But they also understand what our role is here, where we can act and where we cannot. The Bundesbank is a trustworthy institution. Together with the other central banks in the Eurosystem, we stand for a stable currency. That's what I’m fighting for. That is why I have to be honest. As I say to my friends: I cannot promise any miracles. It will take a while, but we will get inflation back under control.

There are firms that set prices significantly higher than inflation requires. Whose job is it to regulate this? The market or the government?

That is typically regulated by the market. There’s enough evidence to suggest that this exuberance has been dampened.

Exuberance sounds very positive. You could also call it a rip-off.

Forgive me for not using that term. Exaggerated prices can quickly cause the pendulum to swing in the opposite direction. Customers and competitors both notice them. However, we are currently experiencing an inflationary environment in which it is easier to raise prices overall. It is our task as central banks to prevent this environment from becoming entrenched.

Once again, what can an average family expect? Should they save or expect significant wage increases that will compensate?

In this context, a call to start saving would be presumptuous. I know that many people are no longer able to save because prices have risen as they have. Energy prices, in particular. And the German economy imports energy on a large scale. This reduces our prosperity. Let’s not kid ourselves: the years ahead will not be easy.

But how are ordinary people supposed to afford this more expensive life?

The government is providing extensive assistance to address the current hardship, to cushion the effect of squeezes at the very least. In our current forecast, we also expect wages in Germany to rise more sharply in the coming years than in previous ones. The stable labour market, together with an upturn in economic activity, is a real bright spot. And we will do everything we can to bring inflation rates down again.

To turn that around: workers will have to push for significantly higher wages and salaries over the next few years in order to offset inflation again.

That is a matter for management and the trade unions. I will not comment on wage settlements. What is important from a monetary policy perspective is that we are not currently seeing divergence in wages and prices. Employers and trade unions are clearly keeping an eye on the balance between the competitiveness of the economy and the need to counterbalance price developments.

We don’t want to fuel the wage-price spiral at all, but...

I am in fact talking about the price-wage spiral...

You’ve reversed the order there.

For one important reason: a wage-price spiral suggests massive wage increases, which then drive prices up. At present, it would be more the opposite: we have experienced a surge in costs, which has led to higher prices.

You’re right, there’s no wage-price spiral in Europe at all! That is why employees should have all the opportunities and arguments on their side: the labour market is already empty, and there is a shortage of skilled workers everywhere. Are employees actually looking at a golden age?

As I said, we are not currently looking at a spiral in Germany. And wage increases are a matter for management and the trade unions - I’m staying out of that. But you describe the trend correctly. Even in a shrinking economy, labour would remain scarce. This is partly down to demographic change: the baby boomers will gradually be retiring in the coming years.

We now have a driver of inflation that won’t even occur to people at first. It bought gas like mad in the summer, for example, driving up prices. And now it’s giving its citizens €200 billion so that they can in turn pay for the high gas prices – it’s the Federal Government we’re talking about. How would you rate its crisis management?

The situation has been very difficult for everyone and I recognise the major challenges facing the Federal Government. However, it’s not my job to give grades here.

But there is criticism that the aid packages are huge, set the wrong incentives and tended to fuel inflation even further.

I don’t share this blanket criticism. First of all, inflation places the greatest burden on lower-income households. Easing the burden on them is something I’m not alone in finding absolutely justified. Furthermore, the measures contain tangible incentives to save energy. This is not the case in all parts of Europe. And then the size of the package has to be seen in relation to the size of the economy and the period of time it covers: Germany is the largest economy in the euro area and the package extends over several years.

Is this now carte blanche for the finance minister to tackle every future crisis with new debt?

Quite clearly, no. The exception must not be allowed to become the rule. During the pandemic we saw how important it was to have been particularly cautious and economical with public finances in the preceding years. This was the only way in which the German government was able to decisively and quickly set up large programmes to protect citizens and businesses alike. Having this financial leeway was a blessing and we need to quickly return to this policy.

But does this also apply to the Federal Government’s method of setting up a large number of special funds and shadow budgets in order to keep official debt low in formal terms?

This method must of course not become the norm. It must remain the absolute exception.

But the exception is becoming the rule.

I don’t share that view. Nevertheless, it is important that the approach is clearly linked to the exceptional situation and the crisis. We need to return to a rules-based policy.

But it already started in the pandemic with the Economic Stabilisation Fund, which is now set to distribute the €200 billion for the gas and electricity price brake as well. Then there is €60 billion for the Energy and Climate Fund. And a €100 billion special fund for the Federal Armed Forces …

We have had several extraordinary events over the past two or three years. But the time has now come in which we must return to normal budgets.

In truth, isn’t the debt brake enshrined in Germany’s Basic Law dead?

That’s not how I see it. I promise that the Bundesbank will in any event continue to clearly advocate in future for sound public finances and binding fiscal rules at the national and European level.

Let’s take a look at one particular sector: real estate. Has buying a home become unaffordable for young families as a result of the rise in real estate prices, construction costs and the interest rate increases?

The environment has become more difficult. Let’s start with the higher interest rates: current interest rates are not actually conspicuously high from a long-term perspective. On the contrary, we had extremely low interest rates for a number of years. Ten years ago, mortgage rates were roughly the same as they are today: around 3½% for a ten-year housing loan.

But houses only cost about half as much back then.

Prices have indeed risen very sharply. Over the past few years, the Bundesbank has repeatedly pointed out that real estate is overvalued in some regions. Prices could now fall again in some cases.

Nevertheless, the dream of owning a home …

… is becoming more difficult.

Shouldn’t banks raise interest rates on deposits as quickly as they do on loans, though?

This is also regulated by competition.

Hold on a second, the interest rates for building finance are at over 3%, while those for overnight money are at 0.5% or 0.75%.

Overnight money is repayable on demand. By contrast, a real estate loan runs for many years and the bank also takes on a risk by lending the money. Such spreads are not set in stone, but in principle this is what constitutes the traditional banking business.

Well, it is a problem though if an entire sector is stifled in this way. The coalition government had set itself a target of 400,000 new dwellings each year. Now that number is going to be much lower.

After years of building at low interest rates, this first has to be digested by everyone. However, experts had pointed out that home-builders should not plan their financing on the basis of interest rates of around 1%, which were still possible to obtain two years ago. People should always ask themselves what they will be able to afford in 10 or 15 years’ time when interest rates could be much higher.

Mr Nagel, it will be Christmas in a few days – you have two children.

More like young adults, I would say.

But surely young adults with a wish list.

(Laughs) Oh yes, they certainly have wishes.

Will inflation nevertheless have an impact on your family in terms of the number of presents?

Many others will certainly have to limit themselves to a much greater extent when it comes to presents. I think my family will get something nice.

“I think” is an interesting way of putting it. It sounds like you haven’t bought any presents yet …

You’ve caught me there. It’s something I do indeed still need to go and do. But, to be honest, presents are becoming a little less important to us in the family. I’m looking forward to us being back together over Christmas in a relaxed atmosphere and having time for each other.

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