Nagel: “We continue to expect an upswing” Interview published in “Handelsblatt”

Interview with Joachim Nagel conducted by Jan Mallien, Sebastian Matthes and Frank Wiebe.
Translation: Deutsche Bundesbank

Mr Nagel, how are you experiencing the Ukraine crisis in your new capacity as head of the Bundesbank?

I am horrified at the military aggression, and my thoughts go out to the people of Ukraine. The terrible suffering there saddens me greatly. This war that Putin is waging needs to be brought to an end. At the Bundesbank, we are supporting the Federal Government in a number of ways, such as by putting financial sanctions into practice.

What will be the economic consequences of war and sanctions?

What we’re experiencing here is a turning point. Trust in Russia – a country with which we had all manner of economic ties for decades – has evaporated and it won’t be coming back in a hurry. What this means for the economy are large-scale, costly adjustments.

In the short term, we are now seeing the strong reactions in the financial and commodity markets. But what do you expect in the long run?

Before the war broke out, we in Europe were already back at a point of being close to the growth path we had been pursuing before the onset of the coronavirus pandemic. Things were heading in the right direction. At present, we’re experiencing a painful lesson in how reliant we are on Russian commodities. Politicians and industry are now aiming to reduce that reliance. And that means a major, protracted restructuring process lies ahead. It overlaps with the energy transition but is supposed to take place at a much faster pace.

Is the Bundesbank equipped for a situation in which an escalation of the crisis might lead to problems in the financial system?

Yes. Ever since the financial crisis of 2008, we have had a crisis management team at the Bundesbank for situations of that kind. As the head of markets back then, I myself played a part in setting up that team as a way of gathering individuals from across the relevant business units – markets, supervision, economics and the like – around one table to harness their wealth of expertise. That means we can respond very rapidly, as needed.

Will recent events plunge us into stagflation – a scenario of mounting inflation combined with economic frailty?

Stagflation is not a scenario I am expecting at present, even if the fallout from the war drives up inflation and drags on economic growth. While it is true that the labour market is already tight, and there are looming problems in Germany due to the shortage of skilled labour, we see no evidence of a wage-price spiral at present. And we continue to expect an upswing – it will just arguably come later.

Given the pressures, it was surprising, though, that the European Central Bank (ECB) signalled an end to the net asset purchases and thus also cleared the way for interest rate hikes.

I don’t think that’s surprising. Remember, we already made it clear at our February meeting that decisions would be made in March. Moreover, we have decided to proceed step by step and to keep all our options open.

Sure, those were the prospects in February. But the war has broken out in the meantime.

Correct, but the war will not only dampen economic activity – it will further amplify what were already stubbornly strong price pressures. The ECB’s experts are now expecting euro area inflation to come to 5.1% this year, and the upside risks have tended to increase for the period after that, too. That is what we responded to.

The decision also contains a change in the monetary policy stance. The wording that any interest rate hike will take place “shortly after” the end of net asset purchases was replaced by “some time after”, which is more vague. Does that mean the first interest rate hike now isn’t coming until later?

The idea behind this wording is to clarify that we are keeping our options open about when we raise key interest rates after the end of the net asset purchases. And in light of the distinct uncertainty, I think it’s hugely important that we don’t commit ourselves in advance but remain flexible.

Is there a possibility that the ECB might soon come to regret Thursday’s decisions if the headwinds for the economy turn out to be even stronger still?

Even if we deemed it necessary later on to react differently, it wouldn’t mean we regret what we did beforehand as we were acting on the data we had at the time. Responding appropriately to incoming data and forecasts is a matter of good monetary policy.

Let’s stay with the data. The ECB’s forecasting models didn’t work properly before the coronavirus pandemic and mostly produced excessively high inflation readings. Last year’s predictions, on the other hand, were far too low. Aren’t you just taking stabs in the dark if you can’t count on models in this difficult situation?

That’s not how I see it. The models offer a good indication of what to expect in the future, based on past developments. But, in particular, the fact that many aspects of the economy are in a state of flux and models are not yet able to capture this properly means that we will not rely on their results alone.

ECB President Christine Lagarde indicated that there were “different views around the table” at the Governing Council meeting. Some members thought the Governing Council should do nothing, while others wanted to move ahead and announce that net asset purchases would be reduced more quickly without making that explicitly dependent on future data. Did you belong to the latter group?

I take the increase in inflation seriously, and that’s something I’ve made clear on previous occasions. We need to keep our sights trained on the normalisation of our monetary policy. But what counts most of all, at the end of the day, is that we agreed on what I would consider a good, balanced decision.

The ECB Governing Council was often a contentious place in the past. Many people are now expecting you to stay true to the Bundesbank’s traditional stability-oriented stance. Others are hoping that you will try to avoid being pushed to the sidelines within the Governing Council. How do you intend to pull off this balancing act?

That’s not a balancing act I need to pull off. People can count on the Bundesbank as an anchor of stability – that’s something I've said from day one. On the ECB Governing Council we all share a common task, which is to safeguard price stability. And the latest decision shows that we are looking to achieve just that. I see my role on the ECB Governing Council as a team player, but one who isn’t afraid to debate controversial topics if need be.

A concern often voiced in Germany is that the ECB cannot raise interest rates far enough because otherwise some countries, such as Italy, would no longer be able to service their debts.

We need to gear monetary policy to our objective of price stability. There can be no compromises on that score. Fiscal policy has a big responsibility at both a national and European level to be a dependable force ensuring sound government finances. Interest rates across the euro area countries are extremely low by historical standards. This is a favourable starting position that will make it easier to cope with interest rate rises.

If the economic situation were to worsen, the ECB could be forced to make targeted purchases of certain countries’ bonds so as to prevent the risk premia on government bond yields getting out of hand in those places.

This is an area primarily for fiscal policy. It is not up to monetary policy to safeguard government financing. So far, risk premia are no higher than they were before the pandemic. And the thing to remember is that, during the pandemic, monetary and fiscal policy both worked well and each made a vital contribution to stabilisation.

Germany is running up hefty debts these days. There are plans to strengthen the German armed forces by creating a special fund sidestepping the debt brake enshrined in the country’s constitution. What do you think about that?

What we are dealing with is a truly exceptional situation. It looks as though the idea is to enshrine a special fund in Germany’s Basic Law. This is a route that would make sense, in my opinion. Amongst other things, its being anchored in the Basic Law – a setup backed by a broad majority in the Bundestag – would not weaken the debt brake.

Do the debt rules contained in the Maastricht Treaty still make sense today? When the Treaty was signed, the Bundesbank’s policy rate was almost 9%; now it’s at 0%.

Talks looking at reform are, as you know, under way and the Bundesbank has contributed its own proposals to those discussions. But whatever we think of the rules and any changes to those rules in terms of the minutiae, there is one thing that we must keep in mind: sound government finances are important. The very high debt ratios that we’re currently seeing need to be scaled back significantly. And that calls for reliable, comprehensible and binding fiscal rules. During the coronavirus pandemic, Germany has greatly benefited from the fact that, in the years running up to it, we created precious leeway for handling later crises.

And a very specific question to end on: how are things going with the new Bundesbank campus? There were delays with the move, weren’t there? And the costs are supposed to end up being higher.

The building standing today was designed in the 1960s and staff moved in in 1972. It’s no longer fit for current requirements. What we need now is a refurbishment that will again stand the test of time. The delayed move has not entailed any additional rental payments.

What are your priorities in terms of the project?

We need to have enough space on the new campus to bring those of our staff who until now have been scattered across various locations in Frankfurt. Alongside up-to-date working conditions, I’m also keen for us to have heating and cooling systems installed that are largely climate neutral. Our requirements in terms of security are also very high; after all, we house around half of our gold reserves there.

But you do hope that the move to the new campus will still be happening during your time as President?

Oh yes, of course!

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