The current Monthly Report explores the factors influencing payment flows to and from Germany and how the banking system ensures that the required payments take place. The Bundesbank’s experts are in favour of excess liquidity being scaled back by the Eurosystem in the coming years to a point where the private interbank market can regain importance in the European payments space.

How might payments in the financial industry be made in future? The latest edition of the Bundesbank’s Monthly Report outlines various possible options in a world in which distributed ledger technology (DLT) is increasingly being used to settle transactions between banks. Central bank money must remain the number one choice for large-value payments, according to the Bank’s experts, though that does not necessarily mean that central bank digital currency needs to be provided directly in a DLT network setup. Nor does it entirely rule out the use of other forms of money. 

German economic output is likely to have gone up slightly again in the second quarter of 2023, according to the Monthly Report. Private consumption has stabilised after previously having fallen. According to the experts, the fact that the labour market remained in good shape, wages rose sharply and price inflation did not continue to accelerate contributed to this development. Meanwhile, the decline in foreign demand was a drag on industry and the rise in funding costs dampened domestic investment. The Bundesbank is expecting the economy to recover haltingly later in the year.

The G20 finance ministers and central bank governors are set to meet in Gandhinagar, India, from 17 to 18 July. Bundesbank President Joachim Nagel will attend the two-day meeting, which will focus on issues including the current situation in the global economy, sustainability in the financial system and the regulation of crypto-assets.

As part of the Bundesbank Invited Speaker Series, Bundesbank President Joachim Nagel discussed the digital euro with economics professor Peter Bofinger. The event was moderated by Falko Fecht, head of the Bundesbank’s Research Centre.

Upon invitation by the Research Centre, Benjamin M. Friedman, Professor of Political Economy at Harvard University, held a lecture entitled “Central banks’ battle against inflation: Implications for monetary policy”. It was followed by a panel discussion featuring Bundesbank President Joachim Nagel, Fritzi Köhler-Geib (Chief Economist, KfW Group) and Jens Ulbrich (Director General Economics, Deutsche Bundesbank). 

Bundesbank President Joachim Nagel believes that a further rise in interest rates will be necessary. Be that as it may, he told the audience at the Bundesbank symposium “Banking supervision in dialogue”, how high they still need to go was impossible to say at this point in time – it would depend on how on inflation developed, which he saw as being highly uncertain. Bundesbank Vice-President Claudia Buch referred to the many challenges for banks posed by the trends of digitalisation, demographics, decarbonisation and deglobalisation. BaFin President Mark Branson warned of greenwashing in the financial sector.

Central government has increasingly relied on off-budget entities in recent times. It uses them for various purposes, such as for the German armed forces, climate change mitigation and energy price assistance. In the current Monthly Report, the Bundesbank recommends refocusing central government finances more strongly on the core budget and making less extensive use of off-budget entities. This could also entail dissolving existing off-budget entities. “Independently of this, the government should provide meaningful information for all off-budget entities,” the experts write. 

The monetary policy tightening seen in the euro area since the beginning of 2022 has led to changes in bank interest rates in Germany, the Bundesbank’s economists write in the latest Monthly Report. For the most part, interest rates on loans to enterprises have risen as strongly as expected, while those on loans for house purchase have increased more strongly than they were expected to. The interest rate on time deposits was raised rapidly and by as much as expected, while that on overnight deposits was adjusted upwards only marginally.

In the Bundesbank’s view, the German economy is recovering only arduously from the crises of the past three years. “In particular, the German economy is still struggling with the consequences of high inflation. This is reducing citizens’ purchasing power,” Bundesbank President Joachim Nagel said as he presented his institution’s latest projections. For the current year, the Bundesbank is expecting gross domestic product (GDP) to contract by 0.3% after adjustment for calendar effects. The economy is expected to expand again in 2024 and 2025, at rates of 1.2% and 1.3%, respectively.