Bundesbank President Dr Joachim Nagel does not rule out further interest rate rise and expects inflation to come close to target only in 2025

Berlin, December 1, 2023

Around 300 guests attend vdp’s annual reception in Berlin

The Association of German Pfandbrief Banks (vdp) welcomed around 300 guests to its annual reception on Thursday evening in Berlin. Among those who attended were representatives of the German Bundestag, various ministries, the Deutsche Bundesbank, the Federal Financial Supervisory Authority (BaFin) and vdp member institutions. The keynote speech was delivered by Bundesbank President Dr Joachim Nagel.

In his welcoming address, the vdp’s President Gero Bergmann took a clear stance against the anti-Semitic incidents that have occurred in Germany recently. He appealed to the historical responsibility of Germany and of each individual: “Never again is now and in the future!”

In the course of his speech, Bergmann went on to discuss developments on the Pfandbrief market which, he said, has once again proven its efficiency and crisis resistance this year. By contrast, falling prices and subdued new financing business have presented the property market with greater challenges throughout the year now drawing to a close. “Neither prices nor the demand for credit are expected to pick up in the short term. The peak of the crisis is yet to come,” Bergmann remarked.

“After 15 years of continuous regulation, a review is overdue”

Finally, Bergmann named the regulatory measures – Basel III, capital buffers and the minimum reserve – that, in the Pfandbrief banks’ view, are currently preventing credit institutions from fulfilling their most important task: to finance the real economy and transformation. He called on policymakers and supervisory bodies to conduct a targeted review of the regulatory framework, arguing it is overdue after 15 years of continuous regulation. “What doesn’t fit needs to be scrapped or altered. That is the responsibility supervisory authorities must fulfil. Then, we banks can assume our own responsibility, which is to create stability in these times of turbulence,” Bergmann insisted.

“Considerably too early to even think about potentially lowering policy rates”

In the keynote speech that followed, Bundesbank President Dr Nagel emphasized that the banking sector has weathered the multiple challenges well so far, thanks not least to the strengthened regulatory capital base. At the same time, he cautioned that the capital buffers that have been in place since February of this year remain necessary in order to make the banking sector even more resilient. Regarding the discussion about the minimum reserve, he commented: “The banks should be able to cope well with a possible minimum reserve increase from 1% to 2%.” In this context, he remarked that the rate of 2% had already been a requirement for a considerable length of time in the past.

Dr Nagel described the excessively high inflation rate as a key challenge facing the monetary policy of the Eurosystem. He went on to explain that, because inflation rates are still expected to exceed the 2% target level this and next year, he believes it is considerably too early to even think about potentially lowering policy rates. Dr Nagel expressed the hope that inflation would finally come close to its target mark in 2025. “Higher financing costs, a lower supply of credit and weaker demand for loans are intentional monetary policy effects. This is a necessary interim step in order to dampen aggregate demand and, ultimately, price pressures,” Dr Nagel pointed out.

Looking to the years ahead, Dr Nagel announced that the Federal Ministry of Finance will likely not be able to expect any profit transfers from the Bundesbank as the Federal Government’s fiscal agent. This is due to the financial burdens resulting from the extraordinarily expansive monetary policy of recent years and the subsequent sharp rise in interest rates. “If the Bundesbank’s financial buffers are no longer sufficient in the next few years, we will report a loss carry-forward,” he said. But even then, he added, the Bundesbank’s balance sheet is sound, and cannot be compared with that of a commercial bank. The Bundesbank holds substantial assets over and above the financial buffers.