Bundesbank President Joachim Nagel expects “significant interest rate hikes” from the European Central Bank beyond March. “The peak of the inflation wave should have been passed, but we expect that the inflation rate will fall only gradually. The price pressure is still very high,” said Nagel on Wednesday at the presentation of the annual report. After five increases in a row since July 2022, the deposit rate relevant for banks in the euro area is 2.5 percent. For the ECB meeting on March 16, the monetary watchdogs have announced a further interest rate hike of 0.5 percentage points.
Current data from the Federal Statistical Office show that price pressure is still very strong. Accordingly, the inflation rate in Germany was surprisingly high at 8.7 percent in February, as the authority also announced on Wednesday in a first estimate. This is the same value as in January – economists had expected a slight decline on a monthly basis. Energy and food prices rose again significantly. In 2022, the inflation rate in the euro zone was 8.4 percent – that was higher than ever before in the history of the monetary union. “Inflation is far from over. It needs further, strong increases in key interest rates to solve the inflation problem in the medium term,” said Joerg Kraemer, chief economist at Commerzbank.
In order to get inflation under control, the ECB has raised interest rates at an unprecedented rate over the past eight months. But the abrupt turnaround in interest rates has a side effect: the Bundesbank is likely to make losses for years to come. There was a foretaste with the annual financial statements for 2022. The Bundesbank closed the past year with a zero. However, a loss could only be avoided by diverting around one billion euros from the risk provision. One thing is certain: Federal Minister of Finance Christian Lindner (FDP) will not receive any money. For years, the Federal Ministry of Finance had traditionally planned a Bundesbank profit of 2.5 billion euros in the federal budget. In 2019, the Bundesbank transferred 5.8 billion euros. The times are over.
The Bundesbank now has a loss buffer of 19.2 billion euros. But that could soon melt away. The currency watchdogs now have to pay 2.5 percent interest on the central bank balances of the commercial banks. For comparison: until early summer 2022, the credit institutions still had to pay “penalty interest” to the Bundesbank. Each further increase in the key interest rate increases the burden on the currency watchdogs, which can no longer be offset by income from bond transactions. “According to various calculations, our risk provisions should still be sufficient in the current year. However, the burdens will probably exceed our financial buffer in the years to come,” said Nagel. “In this case, we will report a loss carryforward.” The German monetary authorities reported the last loss in 1979.
Unlike commercial banks, central banks do not strive for profit – and they cannot be insolvent in the traditional sense, according to the Bank for International Settlements (BIS) in a recent specialist article. The so-called central bank of central banks, based in Basel, knows why it has taken up the topic now: very many central banks will soon be reporting losses.