For the first time in his role as Bundesbank President, Joachim Nagel visited the Bundesbank’s University of Applied Sciences and spoke to students, lecturers and representatives from the banking sector and the political world about decision-making processes in European monetary policy.

Marginal lending facility, collateral framework, minimum reserves – the technical vocabulary used in monetary policy does not sound particularly thrilling at first, which makes the comparison drawn by Bundesbank President Nagel in his speech at the University of Applied Sciences in Hachenburg all the more surprising. He likened the monetary policy decision-making process, in which experts collate data, models, analyses and forecasts, to a crime novel: “It is not usually possible to discern a sequence of events using just one single clue. However, if all the clues are pieced together correctly, they form a picture,” said Bundesbank President Joachim Nagel. There are, of course, particular challenges in monetary policy, just like in a crime novel, he noted. “Sometimes the clues point in different directions. And sometimes the picture they paint is unclear.”

© Sascha Ditscher

President Nagel pointed out that the Eurosystem’s inflation forecasts have shown a rather mixed picture in the past. For many years, the inflation rates forecasted by experts at the euro area central banks tended to be too high; since 2021, the forecasts have tended to underestimate them. President Nagel explained why: “Estimation models are often prone to errors when there are structural breaks. Just like in a crime novel, some clues may be misleading.” After all, he noted, energy prices had picked up markedly even before the outbreak of the war in Ukraine, and the ECB Governing Council had begun to adjust its communication.
“At the press conference following the February meeting, ECB President Christine Lagarde stressed that inflation risks had increased,” President Nagel said. “The markets understood and responded to this message.” They anticipated that short-term interest rates would rise over the coming months and that the first increase in the key interest rates would come at an earlier point in time. This also reflected the central importance of communication with the financial markets, President Nagel added. “The aim is to fuel the expectation that the inflation rate will move towards 2% in the medium term.”

Mandate shapes the exchange of views

 

© Sascha Ditscher

The March Governing Council meeting following the outbreak of the war in Ukraine on 24 February was a milestone on the road towards monetary policy normalisation, President Nagel explained. “Ultimately, this meeting marked a turning point in monetary policy.” It was decided at the meeting that the asset purchases would be reduced at a faster pace. In addition, potential interest rate rises after the end of the net asset purchases were announced. The main guiding principle of the ECB Governing Council’s discussions was the central bank’s clear price stability mandate, President Nagel said. “This was at the front and centre of the discussion contributions at the meeting, despite the difficult geopolitical situation with the war in Ukraine and its ramifications.” With this statement President Nagel countered the impression sometimes created in the media that the members of the ECB Governing Council serve national interests.

Just another step towards normalisation

 Prices have risen again since the March meeting, which has increased the need for the central bank to take action. The outlook is clear for President Nagel, even if he does not wish to pre-empt the forthcoming Governing Council meeting: “This is now about taking a clear step towards monetary policy normalisation, not tightening the reins, as I have read on occasion.” Looking ahead, the task of reducing the huge volume of excess liquidity – which currently amounts to €4,500 billion following the large-scale asset purchases – would also need to be tackled, President Nagel said. “Prior to the outbreak of the financial crisis, excess liquidity stood at zero. Reducing the large bond holdings will pose a separate challenge,” he explained.

Discussion round on a broad range of topics

In the discussion round that followed, students asked questions about current monetary policy, but also about central bank communication. When asked how he currently assesses communication with the general public, President Nagel responded, “Our topics are difficult to understand – for many people it’s as if we’re speaking a foreign language. But right now, clear, simple language is all the more important because the price increases are affecting many people. However, we still have a steep learning curve ahead of us.”

Finally, a more personal question was asked about the amount of sleep the Bundesbank President gets. “It’s not always enough,” President Nagel admitted. “But I knew what I was letting myself in for. The work I do is only possible thanks to the brilliant support I receive from my colleagues.”