The interview was conducted by Florian Schmidt.

Translation: Deutsche Bundesbank

Mr Nagel, what did you pay for a mug of mulled wine at the last Christmas market you visited?

I paid five euro recently in Berlin, plus a deposit for the mug. That did get me thinking what the same mug might have cost a year ago. I think it was 50 cents cheaper last year.

That’s an 11% price hike, far more than the average rate of inflation.

That’s correct but not altogether surprising. The ingredients are bound to be more expensive now, and the people working on the stall might be earning more this year than they did in 2022.

Where else can you feel the effects of inflation?

Inflation is something I mainly encounter at the supermarket. I love cooking, mostly at the weekend, and also shop for those occasions. And I do see that many groceries have gone up in price. But there are also some items that have become cheaper again recently, like butter or whole milk. Overall, though, the effect of inflation is still very clear to see when you look at food prices.

As President of the Bundesbank and a member of the Governing Council of the European Central Bank (ECB), you are responsible for price stability. It’s your job to ensure that consumer prices rise by only two per cent or so on an annual average. How does it feel to be missing this target for the third year in a row?

Not good, of course. Price stability is our core mandate. And the ECB Governing Council deems price stability to have been achieved when euro area inflation stands at 2% over the medium term. We need to carry on working to achieve that objective. The ECB has now raised key interest rates ten consecutive times to great effect: inflation is declining significantly. Just one year ago, we were seeing double-digit inflation rates; now we are at less than 3%. Monetary policy is working.

November, at least, saw inflation drop sharply in Germany. Is this trend decline now set to continue?

Over the medium term, inflation is heading in the right direction: downwards. The turn of the year will probably see inflation tick higher again briefly owing to the impact of one-off effects. You see, the inflation rate shows how prices today compare with those exactly one year ago. And in December 2022, factors such as the immediate assistance granted by central government for gas and district heating were significantly depressing prices. That immediate assistance is absent now, which is why prices are markedly higher than they were back then. All in all, we need to remain vigilant: combating inflation isn’t a task that will take care of itself.

And what prospects do you see for the year ahead? How high will inflation be in Germany in 2024?

The inflation rate will more than halve in 2024. According to our Forecast for Germany, inflation will decline from an average of 6.1% this year to 2.7% next year.

Core inflation – the headline rate with food and energy prices stripped out – has been high recently. The Bundesbank was one of a number of institutions to note that firms’ profit margins widened considerably in 2023. Are firms using inflation as a slipstream to fill their pockets?

That would be too much of a sweeping statement. While there are certainly enterprises that have passed on not only their own higher costs but also price increases beyond that, this will be a more difficult endeavour next year. I firmly believe that competition will cause corporate profits to fall again.

How will real wages evolve next year?

We are expecting net incomes to rise next year, which means that employees in Germany will see their incomes go further again.

The three-party “traffic light” coalition recently hammered out a compromise to resolve the fiscal dispute, but discord has now flared up again over the nitty gritty. What’s your take on the debate in Berlin?

I would like to see the traffic light coalition achieve a sustainable compromise. That reduces uncertainty, which is always a good thing from a central bank perspective. In my view, two points are crucial going forward.

And what would they be?

For the economy to flourish, we need stable framework conditions in areas such as the energy transition. And if I had one wish as regards the Stability and Growth Pact, it would be for EU finance ministers to agree on a stricter rulebook before the year is out – a set of rules that limits government debt and scales back high debt ratios.

Another aspect of the fiscal compromise is a raft of measures that will drive up the cost of living, like the higher carbon price, for example, and the abolition of grid fee subsidies. How much of an impact will these have on inflation?

The effects are limited overall and have already been factored into our Forecast for Germany to a degree. So as things stand today, I am expecting there to be hardly any changes to our statements.

But deep down, there’s no getting around the fact that the traffic light coalition’s fiscal policy is at odds with the central bank’s monetary policy, and not for the first time. Is that right?

No. The government debt ratio is moving towards the 60% ceiling enshrined in the Maastricht Treaty, and it will carry on declining in the years ahead. Germany remains the euro area’s anchor of stability.

Is there such a thing as good debt and bad debt?

There is currently a debate as to whether borrowing for investment is better than borrowing for consumption expenditure. If safeguards are in place to keep new borrowing within reasonable bounds overall, greater consideration could be given to net investment, in my view. That could support the necessary transformation of the economy.

So you’re saying you would like to reform the debt brake.

The debt brake was effective in curbing new borrowing, and thus preserved Germany’s fiscal leeway. That’s something we should keep. That said, the debt brake can be reformed – the Bundesbank made proposals on this topic back in April 2022. For example, the ceiling for net borrowing could be higher if total debt accounts for less than 60% of gross domestic product.

You have just sharply reduced your forecast for Germany’s economic growth in 2024. Back in summer, you were expecting an increase of 1.2%, and now you are anticipating growth of just 0.4% next year. Why is the German economy stuck in its rut while many other countries are performing better?

The economic recovery has been delayed. Stronger growth won’t materialise until 2025 and 2026, while the upturn next year will be somewhat more moderate. One reason for this is that foreign demand for German industrial goods is weaker than had been assumed in the summer. Another is that households’ reticence to spend is unexpectedly strong. And yet another reason is that Germany was hit much more severely than other countries by the war in Ukraine and the fallout from the energy crisis. That is still weighing on us to this day. But that is not to say that everything is doom and gloom – far from it.

It isn’t?

Most certainly not. We have made a gargantuan effort and achieved a great deal. First and foremost, we have made up for the loss of Russian gas and averted the severe economic downturn that some had been fearing. We shouldn’t badmouth the “Made in Germany” business model and talk ourselves into a crisis.

Germany’s Council of Economic Experts had a different take on that recently. Demographic change alone, they say, could result in the German economy falling behind.

There are major challenges, like achieving climate neutrality and addressing the ageing of society. And indeed, the baby boomers’ exodus from the labour market is something we would be unwise to underestimate. The shortage of labour, skilled and otherwise, is already a major issue today – and matters are going to get even worse. All the more reason, then, to address this issue.

Should we all therefore retire later?

By and large, people are living longer nowadays than they used to. The Bundesbank has a very clear opinion on this: the pension-drawing period isn’t the only thing that should be extended, the number of years worked should, too.

You already explained a moment ago that inflation is still too high to already start lowering key interest rates now. Can consumers and firms at least look ahead to one interest rate cut over the course of next year?

Our foremost task is to maintain price stability in the euro area. That is what we are working to achieve. What this means is that we first need to remain on the current interest rate plateau so that the inflation-dampening effect of monetary policy can fully take hold.

So you’re ruling out a cut in interest rates next summer?

On the ECB Governing Council, we look very closely at the data and make decisions on a meeting-by-meeting basis. It’s highly likely that interest rates have reached their peak. To all those who have therefore gone straight to speculating about imminent rate cuts, let me say this: people have been known to back the wrong horse, so be careful.

Are you and the ECB perhaps sticking to your tough monetary policy stance partly because critics accused you of being asleep at the wheel on inflation a year and a half ago?

I have been Bundesbank President and a member of the ECB Governing Council since January 2022, and we are most certainly wide awake there. What counts is what we have achieved: inflation is on the decline. Monetary policy is working. And we are not going through a severe recession. That’s all good news for everyone and for the economy.

In just a few days, you will have been Bundesbank President for two years. Tell me, do people recognise you on the street?

People rarely recognise me on the street, and that’s a good thing. After all, I am not just the Bundesbank President, I’m a private citizen as well.

Has there ever come a time during these two years when you regretted taking on this role?

No. I always sense the responsibility I bear, and I am a passionate advocate of price stability and the Bundesbank. It gives me great pleasure to be the President of the Bundesbank and I look forward to the years ahead.

Mr Nagel, thank you very much for talking to us.
 

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