Joachim Nagel, president of Deutsche Bundesbank, is warming to the possibility of European interest rate cuts starting in June. But he warned against expectations that a series of monetary easing moves is under way.
Speaking at the DZ BANK Capital Market Conference in Berlin, held in co-operation with OMFIF and German state project financing bank KfW, Nagel said he was still ‘not fully convinced’ that inflation was returning to the European Central Bank’s 2% target in a ‘timely and sustained manner’.
However, assuming that monetary easing is backed by wage inflation and other data available in the next few weeks, he said he would be ‘definitely’ in favour of an ECB rate cut at the governing council meeting on 6 June.
The insertion of the word ‘definitely’ – not present in the published speech on the Bundesbank website – was significant. It suggests Nagel is moving firmly in the direction of a strong group of governing council members opining that lower interest rates are necessary to help kickstart the faltering European economy.
In favour of a digital euro
In his remarks opening the third day of the DZ BANK conference, much of it dedicated to digital finance, Nagel launched a robust plea in favour of a digital euro for retail payments by underlining its strategic importance for Europe’s ‘critical infrastructure’. Pointing out that Europe had been lagging other parts of the world in areas like cloud technology, Nagel said a digital euro could be a vehicle for innovation as well as helping secure Europe’s independence in the crucial field of payments.
All these questions have gained in importance because of the challenges facing Europe after the Russian invasion of Ukraine, Nagel said. Similar principles applied to the European Union’s long-running efforts to complete banking union and accelerate the painfully slow process of capital markets union.
Mindful of public scepticism about the digital euro, especially in Germany, Nagel repeated the standard Bundesbank mantra that a digital euro would complement but would not replace cash. Although the digital euro project entered the preparation phase in November 2023, this did not mean that an issuance decision had been taken.
The ECB governing council would decide only after conclusion of the European legislative process. ‘The introduction of a digital euro needs political backing and a solid legal framework,’ he said. Implementation might take ‘another four or five years’.
Differences between Europe and US
On interest rates, Nagel affirmed the ECB’s ‘meeting by meeting ’approach to monetary policy decisions. He said he had an open mind on whether inflation and equilibrium real interest rates would necessarily be higher in future because of issues like decarbonisation and ageing societies.
Asked whether European interest rate policies could diverge too strongly from those in the US, Nagel said the ‘official answer’ was that the ECB was setting monetary policies solely from the vantage point of the euro area. However higher-than-expected inflation and interest rates in the US would feed through into the ECB’s own models for euro area economic trends and inflation. ‘It is clear that if there is a certain development in the US, there are some spillovers.’
Nagel underlined the limitations of comparisons between Europe and the US. ‘The situation in US is different because it’s a demand-driven inflation story in the US, supply-driven in the Eurosystem.’ The US economy is ‘booming’ while, in the euro area, ‘we’re really lagging behind’.
He added that, for Germany, ‘the numbers are getting a little better. The first quarter [of 2024] was weak, but there’s some momentum now’. His conclusion was that the Federal Reserve’s reluctance to cut interest rates was ‘different from the ECB.’
David Marsh is Chairman and Taylor Pearce is Senior Economist, OMFIF.
