Dhe financial system is basically stable. Monetary policy can and must continue to pursue its restrictive course. There are signs of progress in overcoming the debt crisis, which threatens to choke off the economic air of a whole series of poor countries: Bundesbank President Joachim Nagel and Federal Finance Minister Christian Lindner (FDP) were confident at the sidelines of the spring conference of the International Monetary Fund (IMF) and World Bank . They judge the economic prospects for Germany better and the risk for the international financial system lower than the IMF.
After stagnating in the first quarter, the President of the Bundesbank expects the German economy to pick up again as the year progresses. In the end, there should be slight growth. In contrast, the IMF predicted a slight contraction in economic activity for Germany. Basically, Nagel considers the banking world to be stable. “There is no threat of a financial crisis.” There were difficulties at individual institutions for various reasons, he said, referring to the Silicon Valley Bank, which recently collapsed, and Credit Suisse, which had to be rescued.
The central bank must distinguish between the mandate for price stability, which is a priority, and that for financial stability. “We have different instruments for both areas to achieve the two goals,” he emphasized. The finance minister gave a similar assessment of the situation. The sudden and sharp increase in interest rates by the central banks naturally has an impact on the banks’ business models. In view of this, it is to be expected that “individual players on the market miscalculate and therefore get into business difficulties”.
“From a monetary policy perspective, there is still a way to go”
The President of the Bundesbank avoided specifying when the current rate hike cycle will come to an end. The European Central Bank has raised interest rates by 350 basis points since last summer. Nothing can yet be said about the next meeting in May, so you have to wait for the evaluation of further data. At the same time, Nagel made it clear that he assumes that the central bank still has to do something to push inflation towards 2 percent. The core inflation rate, which ignores the particularly volatile prices for energy and food, was 5.7 percent in the euro area and 5.9 percent in Germany. “From a monetary policy point of view, there is still a way to go,” he said.
According to current forecasts, the rate of inflation will only reach the targeted 2 percent again in 2025. “That means the adjustment path requires further interest rate steps.” In any case, one should avoid earlier mistakes. It was often the case that when the signs pointed to a significant drop in the inflation rate, speculation was already being made about the next interest rate cuts. One should therefore initially remain on an appropriate interest rate plateau in order to determine whether the previous increases have permanently and sustainably depressed the inflation rate.
According to Minister Lindner, the return to monetary stability and robust growth must be the focus of monetary and financial policy. Both would have different roles, but the same goal. The federal government sees itself confirmed by the assessment of the IMF. “We have to make our public finances sustainable.” At home, however, the budget negotiations are stalling. Lindner even had to cancel the cabinet’s benchmark decision. The draft budget for 2024 should be ready before the summer break. In order to be able to comply with the debt brake without tax increases, significant cuts are required. The accompanying budget law that is necessary for this is likely to cause some disputes at the traffic lights.
With a view to heavily indebted poor countries, Lindner spoke of progress. China appears ready to reconsider its request to involve multilateral banks in debt restructuring. A workshop is planned to involve private creditors in the restructuring of receivables.