The interview was conducted by Christian Siedenbiedel.
Translation: Deutsche Bundesbank

Mr Nagel, is this terrible wave of inflation finally over?

Yes, I believe this wave of inflation is coming to an end. In its initial phase, it was very challenging, or, as you put it, “terrible”. However, we in the euro area are now well on the way to sustainably achieving our inflation target of 2 %. Based on the Eurosystem projection from June, we should hit this target at the end of 2025. In Germany, the inflation rate of 2 % in August, as measured by the Harmonised Index of Consumer Prices, was a little deceptive, if only for purely technical reasons: the year-on-year rate, that is, compared with August 2023, was more favourable than in other months. We’ll be seeing somewhat higher rates again soon. But I think that we’re past the worst of it: we’ve ridden out the big wave.

Is it still possible that inflation could get out of hand?

I wouldn’t say so. Provided that we don’t see any more unexpected major shocks, like Russia’s invasion of Ukraine in February 2022, for example, then inflation should continue to trend towards 2 %. Nevertheless, we shouldn’t celebrate prematurely and start patting ourselves on the back. We haven’t quite hit our target yet. We must remain vigilant and be wary of the risks on the way back to stable prices – that is our job as a central bank.

How seriously should we be taking the repeated upside surprises to services inflation?

We are taking the higher inflation for services seriously. After all, services make up nearly half of the basket of consumer goods – that’s a lot. In Germany, the prices for services are still rising by around 4 % each year. Strong growth in wages is especially contributing to this. And we are expecting wage settlements in Germany to remain relatively high over the remaining course of 2024 as well. In annual terms, negotiated wages are likely to rise by around 6 %. While there is some fluctuation in the monthly figures, wage pressures in Germany will remain high overall for the time being.

Given this state of affairs, do you think the ECB should risk lowering interest rates for a second time in September?

On the ECB Governing Council, we have stressed that we will not pre-commit to any particular path of interest rates and that we will follow a data-dependent approach to our decisions. Following the interest rate reduction in June, it was a wise move to then wait and see in July and not cut rates any further. For this reason, I will really only be making up my mind at next week’s ECB Governing Council meeting, when I will have a full overview of all the data. As before, we are not flying on autopilot. But I’ll say one thing: I think inflation is making good progress.

When interest rates were first cut in June, only the Governor of the Oesterreichische Nationalbank, Robert Holzmann, voted against the reduction. After all, the ECB had just been forced to adjust its inflation projections upward. Did you not have any concerns in cutting interest rates?

No, I had no concerns in June. From my perspective, the interest rate step was justified by the data. They did not cast any doubt on the general direction of travel, that is, the decline in the inflation rate over a longer period of time. And our monetary policy is still tight, even after the cut in interest rates. However, I do, of course, respect the decision of my colleague Robert Holzmann.

During his time as President, your predecessor Jens Weidmann was often the one who took on the role of the most hawkish member of the ECB Governing Council, the most strident advocate of tight monetary policy. How do you view your role on the Governing Council?

Comparing two completely different situations is always difficult, and it should be up to others to evaluate my work. Our decisions on the Governing Council are reached as a team – one that strives to make responsible monetary policy for the euro area. I wish to seek out solutions together with my colleagues on the ECB Governing Council, which is why I focus more on the team as a whole than on individuals. I think we have done well on this score over the past two years: we have succeeded in bringing inflation down in a challenging environment.

There are economists who fear that inflation could settle at a level noticeably above the ECB’s target of 2 % in the medium term. Do you think that the risk of there being structurally higher inflation in future can be completely ruled out?

In this context, we must clearly distinguish between two things. First, there is the question of whether we are going to see stronger price pressures in the future. That’s something I can’t rule out. We are keeping close tabs on how certain developments are impacting on inflation – these include geopolitical developments, the green transformation and demographic developments. Some academics expect these developments to lead to pressure towards higher inflation rates. A different question altogether is whether inflation will be higher over the long term because of this. And I will be quite clear on this matter: that’s something monetary policymakers hold sway over. Our mandate is price stability.

Would you then say that the ECB is partly to blame for inflation getting out of hand in recent years?

I wouldn’t use the word blame in this context – I consider that to be the wrong category. Hindsight is always 20/20. What is certainly true is that at the end of 2021 – before I joined the ECB Governing Council – it was already foreseeable that the inflation rate would rise, and the ECB continued its asset purchases. In January 2022, prior to Russia’s invasion of Ukraine, we already had an inflation rate of 5 %, which was probably due in part to the coronavirus pandemic. As part of the ECB strategy review that has just begun, we will have to examine the role monetary policy measures, such as asset purchases, played during the low inflation period.

Was it a sticking point that the ECB had committed to tapering asset purchases first before starting to raise interest rates? The economist Markus Brunnermeier mentioned this recently in a discussion with you. As a result, the central bank was unable to respond quickly enough with the interest rate hikes that inflation would have required ...

Back then, it was important to gradually ready financial markets for this reversal. This happened through a series of announcements starting from December 2021. If you look at developments in financial markets, then I’d say that the markets understood this communication and were prepared. The ECB thus succeeded in keeping the negative side effects often associated with changes in monetary policy relatively manageable.

In your role as Bundesbank President, how do you view the economic situation in Germany at present. Is it being talked down?

We are navigating an economic situation characterised by strong headwinds. Recent business communications make it clear that certain sectors are under pressure and need to take countermeasures. But I am very much against talking the situation down, because that stimulates exactly those developments that are being lamented.

What do you mean by headwinds?

As a large export economy, Germany is particularly hard hit by the geoeconomic changes happening at the moment. Let me give an example: we export especially large amounts to China, meaning that any slowdown in the economy there impacts us particularly hard. The uncertainty that we are seeing among consumers and firms is a factor as well. As a result, investment in machinery, equipment and vehicles fell by 4.1 % between the first and second quarter. Overall, economic output contracted by 0.1 % in the second quarter. That should serve as a wake-up call. We need to put growth front and centre, and that means investment needs to become a more attractive option again.

So where might impetus to boost growth come from?

I think the Federal Government’s growth initiative is on the right track: getting rid of bracket creep for taxpayers, cutting bureaucratic red tape, making improvements to depreciation on investments, but also bringing in measures to strengthen incentives to work. These are all sound steps. But, with the summer break over now, they actually need to be put into practice. Words have to be followed up with deeds. It is particularly important that politicians give a clear indication of where things are headed. If there is a dependable setting, firms will start investing more again. The debt brake could also stand to undergo moderate reform, in my view. The Bundesbank has put forward some proposals that would create a little more leeway, provided that Germany keeps to the EU’s rules on debt. But now it’s up to politicians to take action.

How concerned are you by what has happened in Thuringia and Saxony?

I find it very unsettling. Democracy, freedom, openness, including to people from other countries – these are core values. When these are being called into question, we at the Bundesbank cannot just look on dispassionately, either; we need to take a clear stand. A central bank also has a responsibility to society in this regard. And, as you know, we at the Bundesbank have just had renowned historians probe the history of central banking in Germany between 1924 and 1970. I worry when I read about calls for Germany to exit the European Union or leave the monetary union. That sort of thing jeopardises Germany’s position as a business location; it undermines European cohesion. And it’s harmful to our prosperity.

The Bundesbank itself is in the midst of profound change. The plan for the new Central Office in Frankfurt was pared back, there are to be no new high-rises, and eight out of 31 branches are set to be closed. Where do things stand – is more on the way?

Well, that’s already a fair amount that we have planned. This is about making the Bundesbank fit for the future. But it’s also about the Bundesbank’s duty to uphold cost-efficiency. Together with our staff representation committees, we have agreed to let staff work up to 60 % of their hours from home. That has allowed us to significantly downsize our construction plans for Frankfurt. In terms of office space, we can even do without new builds entirely. And we will be designing our future open-plan workspaces in a manner befitting a modern institution. We need to reduce the number of branches because of the trend decline in the use of cash. But the closures will be planned with a long lead time and carried out in a socially responsible way. And we will make sure that the cash supply throughout Germany remains fully intact at all times in future.

So what do the Bundesbank’s staff have to say when they find out they will no longer have their own office in future under these plans?

When the employees first set eyes on their new office environment, there’s bound to be plenty who say it is really great. Despite the success of working from home, it has also taught us how important it is to engage with others. This is tremendously helpful in fulfilling the Bundesbank’s tasks, and that often works better in open-plan workspaces than behind closed doors. It will of course still be possible to go into a quiet space for a while when concentrated individual work is required.

You have also announced your intention to use AI to a greater extent, for example in inflation forecasts. Have there been any successes yet in this regard?

Yes, we are already trialling quite a few things on this front, for example in the area of short-term inflation forecasting. For very complex problems, in particular – which we at the Bundesbank are often confronted with – AI delivers an initial assessment very quickly. We are also already using it to prepare for our meetings. However, for us it is important that AI remains just a tool. People continue to bear responsibility. We remain in the driving seat.

The ECB is currently reviewing its monetary policy strategy again. What would you consider to be important here?

One thing we need to do is to reflect on the past: what was good about the non-standard monetary policy measures, and what was bad? A critical look in the rear-view mirror is important in order to check our use of instruments going forward. Are we well equipped in this context? What topics will be relevant in future?

Would you also want to talk about the inflation target of 2 %?

A review of the inflation target is not on our agenda. We have fared very well with our inflation target of 2 %, also of late. I see no reason to change the target in the current situation.

There was much debate at the time – especially in Germany – about the ECB’s multi-trillion euro asset purchases. Some central bank staff even resigned over the matter. What is your view of this now, after a few years of experience and the realisation of high operating losses at the Bundesbank?

Obviously I would also rather announce profits, and indeed we did have profits over many years. Now, however, we will have to deal with a few years of losses – and we will manage. This is, incidentally, a topic that we communicated at a very early stage. After all, when monetary policymakers purchase assets on a large scale, it is clear that rising interest rates will impact the central bank balance sheet. And this is indeed what has happened. We had to raise interest rates sharply. As the largest central bank in the Eurosystem, the Bundesbank has to shoulder the greatest burden. In the current year, we could potentially see a magnitude similar to that of 2023. Since we have virtually exhausted our risk provisions, we will have to make use of loss carryforwards in the coming years. Nevertheless, an important aspect for me is that the Bundesbank will return to profitability in future. The Bundesbank’s balance sheet is sound as we have large revaluation reserves. For this reason, there is no need for anyone to worry – the Bundesbank does not need any additional capital.

And what’s your takeaway for the asset purchases? Should this instrument be abolished?

One should certainly exercise caution with regard to substantial asset purchases at the zero lower bound. When it comes to safeguarding price stability, it should remain an exceptional instrument for exceptional circumstances. I hope that such exceptional circumstances do not occur again in the foreseeable future. I at least don’t see any signs of this happening. The substantial monetary policy asset purchases were associated with numerous side effects in financial markets. In the strategy review I am calling for a clear delineation of asset purchases at the zero lower bound – we mustn’t overuse this instrument.

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