In an interview with Redaktionsnetzwerk Deutschland (RND), Joachim Nagel, President of the Bundesbank, discussed the current inflationary environment and its implications for the German economy. Nagel addressed concerns over rising interest rates, the role of banks, and the potential impact on the financial system.
Nagel acknowledged the delay in higher interest rates being passed on to savers by banks, stating that some banks are slow to raise rates. However, he expressed confidence that market forces will eventually lead to an increase in competition among banks, prompting more institutions to offer higher rates to their customers.
When asked about the timing of this market correction, Nagel explained that there is nothing preventing banks from actively competing for better conditions for savers. He highlighted that while term deposits reflect the increase in interest rates, savings accounts and sight deposits have been slower to adjust.
Regarding investment decisions, Nagel refrained from giving advice but emphasized the importance of considering market fluctuations. He mentioned the anticipated increase in interest rates and the need to factor in the possibility of market shifts when making financial choices.
Addressing concerns about the delayed response to rising inflation, Nagel attributed the unexpected spike to the Russian-Ukrainian conflict and subsequent increases in gas and electricity prices. He noted that the inflationary pressures were already high due to the pandemic’s impact and emphasized the need for persistent and decisive monetary measures to counteract these developments.
Looking ahead, Nagel stated his expectation that interest rates will continue to rise. The European Central Bank (ECB) is set to convene on July 27, with a 0.25 percentage point increase widely anticipated. Nagel stated that interest rates will be adjusted as necessary to bring inflation back to the ECB’s target rate of 2 percent.
In response to the debate around higher inflation rates, Nagel firmly rejected the notion of accepting a higher inflation rate as a mere adjustment to reality. He emphasized the importance of maintaining the 2 percent inflation target to uphold the credibility of central banks and prevent inflation expectations from escalating further.
Concerning the potential impact on the financial system, Nagel expressed confidence in the stability of the euro and emphasized that the ECB has effectively managed crises in the past. He acknowledged the criticism directed at the ECB but noted that the central bank has fulfilled its responsibilities in maintaining price stability and ensuring the resilience of the euro area.
Nagel acknowledged the challenges of combating inflation, referring to it as a voracious beast. He cautioned against prematurely easing the fight against inflation and lowering interest rates, highlighting the persistence of inflationary pressures even in the face of supply chain disruptions and energy shortages.
When asked about the risk of a recession resulting from higher interest rates and reduced demand for goods, Nagel emphasized that stable prices ultimately benefit the economy as they alleviate the burden on consumers. He anticipated only a slight contraction in Germany’s economic performance, with the European labor market remaining robust.
Discussing the significant government spending during the pandemic and the energy crisis, Nagel acknowledged the necessity of providing support to protect livelihoods and assist families and businesses. However, he emphasized the need to reassess these measures to ensure fiscal sustainability and overcome high inflation.
Regarding the potential risks in the housing market, Nagel viewed the current correction as expected, noting that the Bundesbank had previously warned of overvaluation in the real estate market.
Addressing the regulation of cryptocurrencies, Nagel advocated for consistent and comprehensive regulation to manage the risks they pose to the financial system. He emphasized the need for global implementation to effectively mitigate potential dangers and prevent future corrections.
In conclusion, Nagel underscored the importance of digital currencies, such as the digital euro, in an increasingly digital world. He reassured that banknotes will continue to exist alongside digital currencies, highlighting ongoing efforts to enhance security features. Nagel also emphasized the need to regulate cryptocurrencies to prevent disruptions to the financial system, affirming the ECB’s commitment to addressing this evolving landscape.
https://www.bundesbank.de/de/presse/interviews/-die-inflation-ist-ein-gieriges-biest–913140