It had just been moved to the Internet shortly before the 31st Frankfurt European Banking Congress, which was supposed to take place again as a physical event in the Alte Oper.

Corona and inflation are the two central topics on this banking day: The representatives of the German commercial banks and ECB President Christine Lagarde had a real exchange of blows about whether the higher inflation was permanent;

and whether the central bank doesn't have to react faster than planned.

Christian Siedenbiedel

Editor in business.

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Deutsche Bank boss Christian Sewing and Commerzbank boss Manfred Knof expressed their conviction that inflation would be harder and longer than many believed at the moment.

"Inflation came to stay," said Knof.

"Inflation will last longer and inflation rates will stay higher than many think at the moment," said Sewing.

"A reaction from the central banks should therefore come faster than planned."

Remain “patient and persistent”

ECB President Lagarde, on the other hand, defended the course of the central bank.

Monetary policy must remain “patient and persistent” in such a situation, said Lagarde.

The ECB will decide on how to proceed at its December meeting.

"We are still in a phase where the economy is recovering," said Lagarde.

In particular, rising energy prices, supply bottlenecks and the withdrawal of physical distancing measures led to considerable friction in some economic sectors.

This is reflected in high inflation rates, which should continue to rise until the end of the year.

Lagarde assured that this inflation was "undesirable and painful" and of course there were concerns about how long it would last.

"We take these concerns very seriously and are carefully monitoring developments," said Lagarde.

"We are particularly aware that higher inflation is depressing people's real incomes, especially those at the lower end of the income distribution."

However, to understand what monetary policy should do in the current circumstances, one needs to look at the causes of inflation.

These driving forces are likely to weaken in the medium term, i.e. in the time horizon that is important for monetary policy.

"And since they largely come from the supply side and energy prices, they are likely to slow the pace of recovery in the near future," said Lagarde.

Monetary policy does not help against delivery bottlenecks

Inflation rates have been climbing for months. In Germany, for example, consumer prices in October were 4.5 percent above the level of the same month last year. Inflation in Europe's largest economy is as high as it was 28 years ago. In the euro area, too, the inflation rate of 4.1 percent in October was well above the medium-term target of 2 percent set by the ECB.

Lagarde used some figures to show how temporary effects were driving inflation up at the moment. For example, energy inflation, which had been negative from the beginning of the pandemic until spring 2021, but has now risen to 23.7 percent in October. "This is by far the highest growth rate since the beginning of monetary union," said Lagarde. “It contributed 2.2 percentage points, or more than half, to headline inflation in the euro area of ​​4.1 percent in October.” Lagarde said she expects this rise in energy prices to subside in the course of next year at the latest.

Another example: The Deutsche Bundesbank estimates that the withdrawal of the German VAT cut last year would increase inflation in Germany by around 1.2 percentage points in the second half of 2021, i.e. at the moment.

“But that also means that the same percentage will be deducted from inflation in Germany in January of next year,” said Lagarde.

That speaks in favor of falling inflation rates again next year.

On the demand side, the sharp rise in industrial goods prices can be attributed to the pandemic-induced shift in consumer behavior from services to goods.

For example, instead of renewing their gym membership, people bought fitness equipment to use at home.

That has still not been completely reversed.

Lagarde affirmed that the central bank should “not move on to premature tightening of monetary policy in view of temporary or supply-related inflation shocks,” affirmed Purchasing power is already diminished by higher energy and fuel costs, an inadequate tightening would mean an unjustified headwind for the upswing. "