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, Bundesbank President Joachim Nagel told the RedaktionsNetzwerk Deutschland (RND) media network in an interview. Inflation in Germany and the euro area as a whole came in close to 2% though till February 2026, he reported, though the war in the Middle East had changed the situation. 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, he emphasised. That mainly depended on how long the Strait of Hormuz remained blocked.

Higher energy prices possible for longer

Nagel highlighted further factors that might drive up energy prices over the longer run: 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. The Bundesbank President observed that insurance premiums for cargo vessels might go up as well as insurers put a higher price on risks in the future.

Rising interest rates conceivable in geopolitical situation

If the outlook doesn’t improve noticeably, I would expect us to raise interest rates in June, Nagel said, pointing to the geopolitical situation and rising energy prices. One crucial factor in that decision by the Governing Council was the outlook for inflation, which Eurosystem staff update every three months. The Governing Council also considered the expectations of markets, consumers and firms, and kept an eye on current inflation tendencies.

Nagel not expecting German economy to stagnate

Before the war in the Middle East broke out, the Bundesbank had been expecting gross domestic product (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, the Bundesbank President explained. Despite the tariff policy of the United States, he is not expecting to see the German economy stagnate.

To boost growth in Germany, the country also needed to get to grips with the unpleasant topics, he argued: 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.

Nagel in favour of restoring sound public finances

The Bundesbank President used the interview to call for a stability-oriented reform of the debt brake: As it currently stands, the debt brake no longer safeguards either sound public finances or the EU fiscal rules. The Bundesbank’s reform proposal would see German new borrowing, after a transitional period, returning 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.

Even if the debt ratio increases significantly in the coming years, it is still comparatively low, Nagel commented. 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.

Gold in safe hands

Nagel said he saw no reason to bring the gold stored in the United States to Frankfurt: I have no doubt that the gold at the New York Fed is in safe hands. The gold enjoyed a special legal status there, he added. 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.

Digital euro a matter of European autonomy

Asked to comment on the digital euro project, Nagel emphasised that the new means of payment would be 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.

He also highlighted the strategic benefits of the digital euro. At present, US providers settled 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,” Nagel argued.