ROut of the back rooms, into the open expanse of the Internet: This is what the “Citizens’ Movement Finanzwende” founded by the former Green member of the Bundestag Gerhard Schick also wants to achieve for the monetary policy discussion. On Tuesday evening, ECB Executive Board member Isabel Schnabel addressed the network-wide discussion about inflation, bank profits and green transformation in a webcast by Finanzwende (“We are fighting for a more sustainable and fair financial system”).
Anyone who had hoped that Schnabel could give the all-clear on inflation was disappointed: “My main concern is that inflation will remain too high in the medium term,” emphasized the ECB representative. She contrasted the inflation rates, which were already falling somewhat, with the so-called underlying inflation (“a somewhat unwieldy term”), which is more persistent, i.e. shows an unpleasant tendency to stay put. This is measured, for example, by the rate of core inflation, which is inflation without strongly fluctuating prices such as those for food and energy.
But Schnabel not only mentioned the constant ups and downs in food and energy prices as a disadvantage for a measure of inflation. These prices are also often decided outside of the euro area, such as the price of oil. They are therefore largely unaffected by the influence of the ECB. That is why the central bank is currently paying particular attention to core inflation. However, this has recently continued to be “extraordinarily high” – 5.2 percent, a record since the introduction of the euro.
Wages have risen – but not real wages
The ECB is also keeping a close eye on wage developments, said Schnabel. It is true that real wages, i.e. wages after deducting inflation, have recently fallen. But that is exactly what will motivate employees and unions to try to compensate for the loss of purchasing power in the next collective bargaining. When one talks about wages, however, one must also talk about company profits, emphasized the ECB representative. Regarding the fiscal policy of the states in the euro area, she said that it had recently been “extraordinarily expansive”. A large part of the energy price support was subsidies for fossil fuels – only a small part is attributable to investments: “In the medium term this will have an inflationary effect,” said Schnabel. Speaking of the ECB’s monetary tightening, she said it will take time to see any impact on inflation – so far it is not clear.
Michael Peters from Finanzwende addressed the unpleasant situation for bank customers that banks pass on the higher ECB interest rates to borrowers relatively quickly, but savers continue to receive very little interest. In any case, Schnabel did not see the ECB as responsible for this. The group of banks is very heterogeneous, she emphasized. There are already banks that pay higher interest rates. Of course, the development depends heavily on the competitive situation: if depositors start to shift their deposits depending on interest rates, it will not be long before banks react: “So that also depends on how sensitive the depositors are to interest rates.”
The financial turnaround is a matter of great concern, such as the regulation of banks and shadow banks. Schnabel immediately agreed that it would not be a good solution for central banks to always step in as “firefighters” where prevention would have been better. Nevertheless, she said: “A lot has been achieved in the area of banking regulation.” That was one reason why the banks were relatively stable during the pandemic. Nevertheless, risks have migrated to the non-regulated part of the financial market in this process. You have to keep that in mind: The recent turbulence in Great Britain about the pension funds has shown how quickly an instability of the system can arise from an area that you “didn’t have on your radar”.
“Green” criteria for corporate bonds
Webcast participants also inquired about the role of money supply in monetary policy. Schnabel said that there is obviously no simple connection between the money supply and inflation. Time series show, for example, that there were phases in which the money supply increased sharply without inflation occurring. The ECB is no longer following this as closely as the Bundesbank used to. “I’m not saying that the money supply isn’t informative,” she said. For the moment, however, other, more telling factors played a more important role.
Schnabel also addressed the issues of financial turnaround to green transformation in detail. The ECB is already doing something, but it has to do more to meet the Paris climate goals, was its message. She mentioned that the central bank applies “green” criteria when it reinvests money from maturing corporate bonds. Schnabel explained why the monetary watchdogs are allowed to take care of such things beyond fighting inflation at all, the ECB also has a secondary goal in addition to the so-called primary goal: “If it doesn’t affect price stability, then we are even obliged to change general economic policy to support the EU.”