© Marcus Kaufhold

The lecture hall at Schloss Hachenburg was almost completely packed out when Bundesbank President Joachim Nagel, accompanied by the University’s Rector Erich Keller, entered the room. After giving a warm greeting to students and staff, the President took a brief seat while Professor Keller spoke a few introductory words: It is an honour and pleasure to see you, as President, taking time for the students at your university.

By the time the President took to the podium, the hall was at capacity, with just under 200 people ready to listen to a rundown of his schedule for the week. Upon leaving Hachenburg, he was set to travel onwards to Berlin, where he would be attending a meeting of the Federal Cabinet to discuss the Annual Economic Report. Economic policy also has feedback effects on monetary policy, after all, Mr Nagel explained. On Friday, the Bundesbank President was going to be presenting the Bundesbank’s Annual Report at a press conference in the Kuppelsaal of the Regional Office in Hesse.

“A whole horde of black swans”

The President went on to discuss all of those topics in greater depth, but first took a look back at how inflation has developed since he took office at the start of 2022. Inflation was already well above our target of 2% before the outbreak of the war in Ukraine and, from the Bundesbank’s perspective, it was foreseeable even then that this wasn’t to prove a temporary phenomenon, a point I made during my inaugural address, Mr Nagel stressed. All in all, a whole horde of black swans converged to make inflation run so rampant. Inflation has since started to abate, he continued.

Mr Nagel pointed out that the way things are progressing at the moment also shows that restrictive monetary policy does not necessarily lead to textbook reactions in the labour market: We are not seeing a rise in unemployment, not least because of demographic developments. That said, the tightening of monetary policy had nevertheless had a dampening effect on economic developments. So the decisions we took on the Governing Council of the ECB served at least to bridle inflation.

“No concerns as to the soundness of the balance sheet”

One consequence of the long period of ultra-loose monetary policy is that the profits of Germany’s central bank have held steady since 2020 – they’ve sat at zero. The Bundesbank President went into the why: On the assets side, we have very low-yield government bonds, whilst on the liabilities side we have been having to pay much higher interest on banks’ excess reserves since interest rates went up. At the same time, he made it clear that our mandate is stable prices, not generating as much profit as possible” and that he has “no concerns as to the soundness of the central bank’s balance sheet. Mr Nagel reminded the audience that the Bundesbank has made losses before, back in the 1970s, and used loss carryforwards to absorb them – a strategy that the Bundesbank intends to employ again this time round.

The President’s speech ran for 45 minutes and was followed by a further 45 minutes of discussion, with Professor Keller acting as moderator. One student wanted to know whether the forward guidance through which the ECB Governing Council communicated its policy plans to the markets during the period of low interest rates was a thing of the past. Nagel’s reply?0 Forward guidance is not dead. But there’s been a complete change in the signs as a result of the structural breaks that 2022 brought. What we are doing now is being guided by the data, thinking from one meeting to the next – and that’s the right way to do it.

Another student asked whether the digital euro might actually pose a threat to cash. Mr Nagel stressed that the Bundesbank is committed to cash. But we can’t ignore reality. If the environment consistently becomes more and more digitalised, he believes that calls for a response. And the Bundesbank President does not want to rely on payment providers domiciled outside the euro area to provide that response: We’ve already seen it in the case of energy supply – system-relevant infrastructures need to be based in the euro area.

“Without airs and graces”

© Marcus Kaufhold

The wide-ranging discussion was topped off with a lengthy round of applause to officially send the President on his way. But, before leaving, Mr Nagel did stop for lunch with the students and lecturing staff. After that, a handful of students and Professor Keller even took him on a whistle-stop tour of the castle. For the President, it was a good way to start an eventful week, and for the students and teachers at Hachenburg, it was a wonderful opportunity to spend some time with the top boss. Student Caroline Rudloff spoke for many when she reported afterwards: It was brilliant. The President came here without airs and graces and came across as genuinely approachable.