Joachim Nagel, President of the Deutsche Bundesbank: “The era of negative interest rates is over”

August 6, 2022

Interview with Joachim Nagel, President of the Deutsche Bundesbank, conducted by Jan Mallien and Frank Wiebe.

Mr Nagel, after talk of a quarter point rise in interest rates, the ECB has now announced a larger hike of half a percentage point. What’s your take on this?

I have always been committed to decisively combating high inflation. From my point of view, it is better to make a bolder interest rate move at the start and reduce the risk of having to hit the brakes too hard later on. I am very pleased with the interest rate decision we reached in the ECB Governing Council. The era of negative interest rates is over.

Should the ECB have acted sooner – in the winter or spring, for example?

It’s easy to say that with hindsight. We are living through very turbulent times right now. I’m looking ahead.

And where do we go from here? What interest rate level will the ECB ultimately have to achieve in order to keep inflation under control?

Ensuring price stability in the medium term is key. Monetary policy normalisation – and thus also the process of raising interest rates – must continue. The steps we take and the extent to which we raise interest rates will be driven by the data.

Suppose we end up in a very difficult situation – one in which, say, gas imports from Russia are halted and a severe recession is looming. Would it then also be conceivable to stop or reverse the tightening of monetary policy?

Monetary policy in the euro area has a clear objective – price stability. And for the ECB Governing Council, the medium-term inflation outlook is a crucial factor here. Of course there are downside risks to growth. But we are still expecting positive growth rates this year and next. And we see upside risks to inflation. The surging prices are hurting not only consumers, but also the economy as a whole. It was important not to wait any longer, but to take action now.

Let’s talk about the new instrument, called TPI for short, which allows the targeted purchase of government bonds of individual countries in order to limit the risk premiums (spreads) vis-à-vis German government securities. The ECB can already intervene through the older programme, known as OMT. Why is a new instrument even necessary?

The OMT programme is designed to address severe distortions in the government bond market linked to unjustified concerns about the cohesion of the monetary union. The Member States that participate in it also have to request assistance from the European Stability Mechanism (ESM) in order to conduct their economic policies in a sustainable manner and reduce their debt levels. The TPI is designed to address other fundamentally unwarranted, disorderly market dynamics. The instrument is primarily geared towards the normalisation of monetary policy. Fulfilling our mandate of price stability is what’s at stake here. We want to prevent potential market disruptions from jeopardising the effectiveness of our monetary policy.

What do unwarranted, disorderly dynamics mean to you?

In individual cases, every situation in the markets needs to be analysed in detail. Of course, when we refer to exceptional situations, we mean those situations in which market developments are not consistent with the fundamentals. This can be gauged, for example, from current developments in spreads, or market liquidity compared with previous situations or other countries.

After all, use of the new programme is conditional on four criteria designed to ensure that it is only used if the country concerned has a sound economic framework. But what might this look like in practice? On the ECB Governing Council, 25 – soon to be 26 – unelected individuals will then be discussing whether or not the elected government of a country can receive assistance.

When it comes to the new instrument, it isn’t about providing assistance to the governments of individual Member States, but rather about the effectiveness of monetary policy transmission and thus the safeguarding of price stability. That is our mandate. In view of this, we decided yesterday on the TPI framework. If there is a specific potential use case, we have the analytical capacity to substantiate the decision that will then be made. However, it was always important to me that external assessments, such as those of the European Commission, the European Stability Mechanism (ESM) and the International Monetary Fund (IMF), were also included.

But the ECB Governing Council ultimately reserves the right to make the decision. Might this not be ery difficult in some cases?

Only the Governing Council of the ECB can make the concrete decision, within its mandate as an exclusively competent and independent institution for monetary policy. The Council has demonstrated its ability to make difficult decisions, particularly at its most recent meeting.

What was the atmosphere like when you were preparing the TPI?

Very intense and very constructive. I think it is important that we have finally come to a sustainable solution with the TPI. The discussions were worth it.

In the past, the ECB’s purchase programmes have been repeatedly challenged in court. You voted in favour of the instrument. What makes you assume it is legally watertight?

In designing the TPI, the Governing Council of the ECB placed particular emphasis on taking account of legal requirements and constraints. I am therefore confident that it would be upheld by the courts in the event of any legal proceedings.

Source: Deutsche Bundesbank
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