Please note that the following text is based on a speech delivered at a press conference.
1 Introduction
Ladies and gentlemen,
I am pleased to welcome you to our press conference where we will be presenting our annual accounts.
First Deputy Governor Sabine Mauderer will provide a detailed explanation of our annual accounts shortly.
Before we delve into the financial details, I would like to discuss the current economic trends and their implications for our monetary policy. At the end of my remarks, I will also highlight key figures from our profit and loss statement.
2 Economic Policy Challenges in Germany
Following the recent Bundestag election, the focus is on the election results and the formation of a new government.
It is crucial for Germany to have a stable and effective government that can implement smart economic policies to stimulate growth and address structural challenges.
Currently, the German economy is experiencing stagnation, primarily due to structural issues in export-oriented industries and global competition.
While a slight economic recovery is expected, risks from international trade and geopolitics remain a concern.
We look forward to presenting our recommendations on how to revitalize the German economy and support the government in its economic policy decisions.
3 Inflation Trends in Germany
Our primary goal remains to maintain price stability.
Inflation in Germany has decreased but remains above the target of 2%. We expect a gradual decline in inflation rates in the coming years.
Despite the outlook for stable prices, concerns about inflation persist among the public. It is important to understand the impact of inflation on households and the economy.
Our research indicates that households are adapting to the changing price levels, and strong wage growth has helped offset some of the inflation-related challenges.
However, nearly 40% of people are concerned or very concerned about their household financial burdens becoming too high. Among households with a monthly net income of less than €2,500, more than half share this concern. These personal experiences of high inflation have a lasting impact on inflation expectations and can also have political implications.
To address these concerns, the ECB Governing Council has taken unprecedented monetary policy actions to combat high inflation and keep inflation expectations anchored. The inflation rate in the euro area decreased to an average of 2.4% in 2024, with expectations of reaching the medium-term target of 2% this year. While the outlook for prices is optimistic, there are still concerns about persistently high core inflation and strong services inflation.
Given the uncertainty surrounding inflation, it is prudent for the Governing Council to proceed cautiously with monetary policy and avoid rushing into further interest rate cuts. It is important to remain data-dependent and not pre-commit to a specific rate path. The annual accounts for 2024 reflect the impact of the monetary policy tightening on the Bundesbank’s earnings situation, with an accumulated loss expected for the year. At last year’s annual accounts press conference, I mentioned that the highest annual burdens would be behind us in 2024. This prediction has proven to be accurate, as the loss figure for 2024 is lower than that of 2023. The accumulated loss for 2024, totaling €19.2 billion, will be carried forward to subsequent years and offset against future profits.
It is worth noting that the Bundesbank experienced an accumulated loss in the 1970s, most recently in 1979. Dealing with such situations is not new for us.
In 1974, the Bundesbank recorded an accumulated loss equivalent to just under 1% of gross domestic product. In comparison, the accumulated loss for 2024 corresponds to just under 0.5% of GDP.
While the financial burdens are expected to be considerable in the current year, they will be less than in 2024. With key interest rates declining and the balance sheet shrinking, the earnings situation is expected to improve significantly.
Although peak annual burdens are likely behind us, losses are expected in the coming years. The accumulated loss will increase as annual burdens from future periods accumulate.
Profit distributions to the Federal Government are not expected for some time. The Bundesbank’s balance sheet remains sound, with high revaluation reserves, particularly in gold.
In conclusion, while we may not be able to distribute profits at this time, the Bundesbank remains fully capable of ensuring price stability. Profit transfers to the Federal Government will resume in the future once the impact on the balance sheet has faded. Price stability remains a top priority. Thank you for your attention. Therefore, it is crucial that a new government is swiftly formed. All parties involved must understand their responsibility in ensuring Germany has an effective government that can implement smart economic policies to revive the economy. This will put Germany on a path towards higher growth by providing greater planning certainty and improving supply-side conditions.
Currently, the German economy is facing stubborn stagnation, with minimal growth in real gross domestic product since 2018. While there was a rapid recovery from the initial pandemic slump, the economy has been stagnant since then, unlike other countries that are experiencing growth.
The challenges in the German economy are not just cyclical but also structural, especially in export-oriented industries facing pressure to adapt to factors like high energy prices and demographic changes. Additionally, German enterprises are facing increased competition from emerging markets and bureaucratic hurdles.
Despite some growth expected in the future, there are risks from international trade and geopolitics, making it crucial for the new government to take effective measures swiftly. Leveraging Germany’s strengths such as stable institutions and innovative enterprises can help stimulate investment and economic growth.
Inflation in Germany has been falling but remains above the target rate. People are still concerned about rising costs of living despite the expected return to price stability. The impact of high inflation experiences on inflation expectations and political sentiments cannot be overlooked.
Central banks must strive to prevent high inflation experiences to avoid negative impacts on the economy and society. In order to effectively address the issue of high inflation, significant measures have been taken by the ECB Governing Council. A historic shift in monetary policy has helped to curb inflation and maintain stable inflation expectations. The inflation rate in the euro area has decreased to an average of 2.4% in 2024 and is expected to reach the medium-term target of 2% this year. This progress has allowed for further reductions in key interest rates and a gradual reduction in the balance sheet.
While the outlook for prices is positive, concerns remain about persistent core inflation and strong services inflation. It is important to proceed cautiously in light of the current inflation trends. Services inflation, in particular, has remained around 4% for several months and must be addressed to bring headline inflation down to 2%. Wage pressures easing in the euro area could help in this regard.
Uncertainty in the economic environment suggests a cautious approach to monetary policy, avoiding hasty interest rate cuts. The Governing Council should continue its data-dependent, meeting-by-meeting strategy without committing to a specific rate trajectory. This flexibility is crucial given the uncertain inflation landscape.
The Bundesbank’s annual accounts reflect the impact of the monetary policy tightening undertaken to control inflation. While this approach was necessary, it has implications for the bank’s earnings situation in the years to come. The Bundesbank has made provisions for potential risks and managed to achieve a balanced result in 2023. However, an accumulated loss of €19.2 billion for 2024 will need to be carried forward and offset against future profits.
It is important to acknowledge and address the challenges posed by high inflation and to adopt a strategic and cautious approach to monetary policy to ensure long-term stability and sustainability. This amounted to just under 1% of the gross domestic product that year, which is equivalent to just under 0.5% of GDP for 2024. There are differences between the past and present circumstances, with the main factors shaping the situation not being the same as those at play now.
While financial burdens are expected to be significant in the current year, they are projected to be less than in 2024. Key interest rates are decreasing, and the balance sheet is shrinking, leading to an improvement in the earnings situation. It is likely that the peak annual burdens are behind us, but losses are anticipated for the next few years, causing the accumulated loss to increase for some time.
Although profits are expected in the future, they will be used to reduce the accumulated loss and build up new risk provisioning, delaying profit distributions to the Federal Government. It is unrealistic to specify a date for when profit distributions will resume due to uncertainties in key interest rates and other framework parameters.
Despite the inability to distribute profits, it is important to note that the Bundesbank maintains a solid balance sheet with high revaluation reserves, particularly in gold. The value of these reserves surpasses the current and projected accumulated losses, and it increased significantly last year.
The Bundesbank remains unrestricted in its actions and is committed to ensuring price stability. It will transfer profits to the Federal Government again in the future, once the impact on its balance sheet has diminished. The primary focus remains on achieving price stability.
In conclusion, European monetary policymakers have navigated an extraordinary decade marked by low inflation and significant policy shifts. The impact on central bank balance sheets will take time to fade, but the Bundesbank is poised to transfer profits to the Federal Government in the long term. The key goal remains ensuring price stability.
The press conference will provide more detailed information on the annual accounts. Thank you for your attention. By ensuring greater certainty in planning and improving supply-side conditions, the German economy can overcome its current state of stagnation. Structural problems, such as pressure on export-oriented industries and high energy prices, need to be addressed. Additionally, competition from emerging market economies and bureaucratic hurdles hinder growth.
While there are strengths to leverage, such as stable institutions and innovative enterprises, economic policy must be smart, consistent, and reliable to stimulate investment. The Bundesbank is committed to supporting the government in implementing effective measures to spur economic growth.
Inflation in Germany has been falling but remains a concern for many. Wage growth has offset some inflation-related losses, but households still worry about rising costs. The Bundesbank expects inflation to continue to decline, with a sustainable return to 2% expected in 2026. Central banks, including the ECB, play a crucial role in maintaining price stability and combating excessively high inflation. Through monetary policy measures, inflation expectations have been anchored, and the euro area is on track to reach the 2% target. This would enable the Governing Council to further reduce the key interest rates. As of now, the deposit facility rate has been lowered five times and currently stands at 2.75 %. While this rate may not be far from the neutral rate of interest, it is challenging to determine the exact figure. Additionally, progress has been made in gradually reducing the balance sheet within the Eurosystem.
The overall outlook for prices is positive, although there are concerns regarding persistently high core inflation and strong services inflation. Recent developments in inflation also warrant caution. Headline inflation is primarily being driven by services, which have been hovering around the 4 % mark for some time.
In order for headline inflation to decrease to 2 %, there needs to be a less rapid increase in services prices. This is expected to occur as wage pressures ease in the euro area. However, there is a possibility that inflation could exceed the current baseline scenario, particularly if there are retaliatory tariffs in response to protectionist measures in Europe.
Given the uncertainty surrounding inflation and the current environment, it is prudent to proceed cautiously with monetary policy and refrain from hasty interest rate cuts. The Governing Council should continue to adhere to a data-dependent approach and avoid committing to a specific rate path publicly.
The annual accounts for 2024 reflect the impact of ten consecutive interest rate hikes and a 450 basis point increase, which was unprecedented in the euro area. While this restrictive monetary policy was necessary to control inflation, it also has significant implications for the Bundesbank’s earnings in the years to come.
The Bundesbank’s annual accounts highlight the challenges faced during the sovereign debt crisis, which led to a loose monetary policy with interest rates lowered to zero and securities purchases on a large scale. The balance sheet expanded significantly, resulting in substantial interest rate risk.
Despite these challenges, the Bundesbank managed to achieve a balanced result in 2023 through provisions and reserves. However, the accumulated loss in 2024 was lower than in the previous year, indicating progress towards offsetting future losses.
While the financial burdens are expected to remain significant in the current year, they are projected to be less than in 2024. It is essential to navigate these challenges cautiously and continue to address them responsibly. With key interest rates decreasing and the balance sheet shrinking, earnings are expected to improve considerably. Peak annual burdens may be in the past, but losses are anticipated for the next few years. The accumulated loss will continue to increase as annual burdens from future periods accumulate. However, profits are expected to return eventually, which will help reduce the accumulated loss and establish new risk provisions.
Profit distributions to the Federal Government will not happen for some time due to uncertain key interest rates and other framework parameters. While there is no specific timeline for when profit distributions will resume, it is essential to note that the Bundesbank maintains a solid balance sheet with high revaluation reserves, especially in gold.
Despite the inability to distribute profits currently, the Bundesbank remains financially sound and fully capable of maintaining price stability. European monetary policymakers have faced challenges over the past decade, but the focus remains on achieving long-term price stability. Profit transfers to the Federal Government will resume in the future, but the priority is ensuring price stability.
In conclusion, the Bundesbank is committed to its mandate and is well-prepared to address any challenges that may arise in the future. Thank you for your attention. Please rewrite this sentence. Please rewrite this sentence.
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