Our job is not done yet Interview with Börsen-Zeitung

The interview with Joachim Nagel was held by Mark Schrörs.
Translation: Deutsche Bundesbank

Mr Nagel, with regard to the ECB’s interest rate increases in 2022, there was often talk that “only the first half” had been played – in the sense of achieving a neutral interest rate that no longer stimulates the economy but does not slow it down yet, either. And that there would have to be a second half. Following the renewed interest rate hike of 50 basis points last Thursday – are we still at the beginning of the second half, already in the middle of it, or even just before the final whistle?

The comparison sounds good, but it is faulty. Monetary policy tightening is not subject to fixed playing times after which the referee blows his whistle. We can only stop once it is assured that we will bring the euro area inflation rate back down to our medium-term target of 2%. Inflation has recently declined, which is gratifying. However, it remains far too high for the time being. The decline to 8.5% in January was virtually celebrated by some. I don’t get that.

The background to the question is that, following the announcements made last week, some observers are already speculating that interest rate hikes could already be concluded after the planned further interest rate hike of 50 basis points in March – but, at the latest, once the deposit facility rate hits 3.25% in May.

First of all, with the interest rate hike last week, we already announced an interest rate increase of another 50 basis points for March. This is a strong commitment to a consistent monetary policy. However, as things currently stand, I do not see our job as being done yet with the interest rate move in March. I believe that we must also raise rates even further in order to create the necessary drag to bring inflation back down to 2% in a timely and sustainable manner. If we let up too early, there is a great danger that inflation will become entrenched. In March, we will know more about where exactly to go from here. Then we will have new data and the new ECB staff projections.

In other words, even after the renewed increase, interest rates are not yet restrictive?

The deposit facility rate now stands at 2.5%. Short-term real interest rates are still significantly negative owing to the fact that inflation remains far too high. Given all the uncertainty: this does not look restrictive to me.

And that also means that the deposit rate will have to rise more towards 4% because 3.0% or even 3.25% will not suffice?

From my current perspective, further significant interest rate increases will be needed. However, I think our step-by-step approach is the right one – for there are many unknowns. Energy prices, for example, are very volatile. The end of the lockdown measures in China may ease supply chains yet increase inflation via commodity prices. We are also keeping an eye on further wage developments. The greatest unknown, however, is, of course, Russia’s war. At any rate, it would be dangerous to think that we are already “over the hump” and that the inflation problem has been resolved. Inflation is not yet over.

Some of your fellow Governing Council members have said that interest rates will have to rise for at least as long as core inflation picks up.

The core rate is an important monetary policy indicator. It reflects price developments excluding the volatile energy and food prices and helps us to better assess the future path of consumer prices. And the core rate is currently showing that inflation is increasingly eating its way through the economy and gaining in breadth. We cannot be pleased with that. We must not let up now, even though energy has recently become cheaper.

How much does it bother you that market participants sometimes give little credence to the signals? In some cases, there is even speculation of interest rate cuts this year, which is easing financing conditions – partly counteracting the interest rate increases.

No one should underestimate how serious the ECB Governing Council is about rapidly bringing inflation back to 2%. I would strongly recommend interpreting the latest statement as what it is: a robust announcement that goes beyond the March meeting. We are still far from having achieved price stability; our job is not done yet. Interest rate cuts are nowhere to be seen on my agenda for the foreseeable future.

Is this all the more true given that, in future, there could be structurally higher inflation – for example, owing to deglobalisation, decarbonisation and demographics?

Caution is indeed warranted. We cannot rule out the possibility that these developments could lead to structurally higher inflationary pressure in the future. The onus is therefore much more on monetary policy to safeguard stable prices.

Some argue that inflation targets should be raised.

This idea pops up time and again but I take a dim view of it. Tinkering with the inflation target willy-nilly would undermine central banks’ credibility – and thus damage price stability.

In March, the Eurosystem is set to start shrinking its balance sheet, which had been heavily inflated by asset purchases, in particular the holdings under the older asset purchase programme (APP). How comfortable are you about this? This is indeed entirely new terrain.

The markets will be able to cope well with the €15 billion monthly reduction in the balance sheet. If inflation is so high and we raise interest rates, we cannot leave asset holdings unchanged.

And, after June, will the pace of the balance sheet reduction then increase?

What we now need to do first is to gain experience. But I would argue that we should look in a timely manner at how much we can increase the speed of shrinkage as from July. The €15 billion per month is not likely to be the end of the story.

The modalities for reducing the balance sheet that have now been adopted highlight the fact that, with regard to corporate bonds, the remaining reinvestments are to be geared more strongly towards issuers that make a better contribution to climate protection.

We as the Eurosystem have repeatedly made it clear that we need to take climate change even more seriously going forward. I believe that this current decision is a strong sign that we are making a contribution to the climate objectives within the framework of our monetary policy mandate.

But isn’t this kind of “green monetary policy” a source of great danger? The turnaround in interest rates that is now underway has also come in for stinging criticism from some who claim that it impedes investment in the green transformation.

As a central bank, it is, and will always be, our primary objective to achieve price stability. We take sustainability matters into account to the extent that they are compatible with this primary objective. Needless to say, politicians are in the driver’s seat as far as climate action is concerned. But as a central bank, we can also provide impetus for other market participants. And that is what we are doing.

Another hotly debated topic as far as reducing the balance sheet is concerned are the looming losses that are heading the central banks’ way because of the large stocks of bonds and the quick turnaround in interest rates. How dangerous is this for the ECB?

The Bundesbank set aside provisions precisely for this reason over the past few years and we also attracted some criticism for doing so. Now it is clear that we did the right thing. The Bundesbank and others have pointed out that extensive asset purchases come with risks attached. One of those risks materialises when interest rates rise. That said, the effects on our profitability must not hold us back from making the monetary policy we think is necessary from a price stability perspective. And believe me, they won’t hold us back.

So how bad are things going to get for the Bundesbank now?

There aren’t any major effects yet for the year just ended, for financial year 2022. Remember, the interest rate hikes only got going in mid-2022. But in the current financial year and in the periods after that, the financial burdens we will then have to shoulder will be considerable. If those burdens exceed the provisions, we will recognise loss carryforwards. There was a spell back in the 1970s when the Bank reported loss carryforwards. The Bundesbank will manage.

And aren’t you also worried about what this means for the Bundesbank’s independence?

I don’t see this as any threat to the Bundesbank’s independence. What matters is that we gear our monetary policy to price stability, even if that does put a strain on our profitability for a time.

Last week saw the ECB Governing Council issue a very stark warning against an overly accommodative fiscal policy that could fuel inflation and make it more difficult for the ECB to do its job. Does that go for Germany, too?

Germany’s economy is faring significantly better than had been feared. It will possibly stagnate, more or less, this year rather than fall into recession. I don’t see any signs of a hard landing. This means that more leeway might also open up on the fiscal front. In that case, it would be good for government not to use that scope to launch additional programmes that might stoke inflation.

Are you also more confident than you were a few weeks ago about where inflation is heading in Germany?

Our assumption up till now was that inflation would come in at “seven point something” on an annual average. Based on the latest data, inflation could well end up landing somewhere between 6% and 7%. However, underlying price pressures in the economy are still strong. Over the medium term, I am still seeing fairly high inflation rates right now.

Do you share concerns that Germany is at risk of deindustrialisation as a result of the energy crisis?

There will certainly be isolated cases. But I cannot see any general trend towards deindustrialisation. I firmly believe that Germany is a very strong business location. In the past, enterprises and their employees have shown time and again how well they can adapt to new circumstances. I’m counting on them to show the same adaptability now.

In closing, let’s turn to a number of European issues. Last week saw the European Commission unveil its proposal for a response to the US Inflation Reduction Act (IRA). What’s your take on that?

Of course, it’s a matter of debate whether that US Act contains protectionist elements that aren’t palatable for us here in Europe. I think a great deal can still be achieved on that point in negotiations with the US administration. At the same time, though, that legislation also spurs the business community into action and encourages us in Europe to close ranks. What we certainly don’t need is a subsidy race. But the time has now come to press ahead with the capital markets union and boost Europe’s competitiveness in the global arena. There’s no lack of specific initiatives – securitisation and green finance are just two I could mention. The US Act is a challenge – there’s no doubt about that – but it’s also an opportunity for Europe.

Another challenge is the reform of the EU’s fiscal rules.

There are no two ways about it: the European Commission’s reform ideas have disappointed me so far. They would miss the goal of stringent and simple rules. Quite the opposite: the proposals spell greater complexity and more scope for discretion. I would like to see some more work done on this. Because we need binding rules to make economies less vulnerable when they have high debt levels. Sound public finances are a key requirement for stable prices.

A lot of work also needs to be done when it comes to the digital euro. The euphoria in political circles seems to have dissipated somewhat owing to the sheer complexity. Can we still expect a decision to be made this autumn on whether the project will go ahead?

It’s a complex project, there’s no doubt about that. But the timeline for the final decision is unchanged. There are three points I would like to stress here: it’s not about making people less anonymous. And nor are we looking to replace banking business, far from it. In my view, as the world goes increasingly digital we need the digital euro – as a complement to cash. Private crypto-tokens are a different kettle of fish altogether. We quite deliberately do not refer to them as currency. This topic worries me.

What exactly do you mean by that?

The risks in our area of responsibility currently appear to be manageable right now, but that can change quickly. And there’s another aspect we should not overlook: the market is opaque. There is a lot of money in this area, with some originating from dubious sources and possibly flowing into the wrong channels. It can be misused for criminal activities, such as money laundering and terrorist financing. As state institutions, we shouldn’t turn a blind eye to this.


The debate on this topic is beginning to gain traction. The options range from regulating crypto-tokens, curbing them or, if the problems cannot be solved through regulation, possibly even prohibiting them. Much has already been achieved when it comes to both regulating and curbing crypto-tokens. The debate that has now sprung up is mainly about whether that goes far enough.

There have already been calls in the United States for crypto-tokens to be banned.

Either way, it would be important to have a global solution.

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