Germany's banks are very skeptical that inflation will now really fall again, as the European Central Bank (ECB) expects.

At an online event organized by the Association of German Banks (BdB) and the German Economic Institute (IW), Banking Association Chief Executive Christian Ossig said inflation had risen “suddenly” and “globally”, most recently to around 5 percent in Europe and 7 percent in the United States.

"Many economists don't expect it to return to its low levels of the past few years." Some expected inflation rates to remain at 3 to 4 percent, others at 5 to 6 percent.

"Monetary policy must respond to this," Ossig demanded.

"And yesterday's ECB responses should not be tomorrow's."

Came to stay?

Christian Siedenbiedel

Editor in Business.

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The ECB Governing Council, the highest monetary policy body in the euro zone, meets next week for the February meeting.

In principle, that would be the next opportunity for changes in monetary policy.

At the event, ECB economist Frank Smets made it clear once again why the central bank sees no reason to act at the moment.

The central bank is pursuing its inflation target in the medium term and is looking at the inflation rates to be expected in the coming years.

That is the period within which their instruments could actually work.

It bases its monetary policy on the projections for these periods.

"December's 5 percent inflation is obviously well above our target of 2 percent," Smets said. For 2023 and 2024, however, the central bank is currently expecting annual average inflation of only 1.8 percent. These are inflation values ​​below their target of 2 percent for both years. The central bank sees itself confirmed in this view by its surveys of professional analysts. They even expected only 1.6 percent for the coming year, and then also 1.8 percent for 2024.

At the moment it is above all energy prices that have risen sharply, emphasized Smets. In addition, there are the delivery bottlenecks, which are only of a temporary nature, as are the consequences of the economy starting up again. "Many prices that fell at the beginning of the pandemic are now rising again," Smets said. So far, there has been no wage-price spiral that could permanently drive up inflation rates, even if there are signs of rising wages.

The effects of the new Omicron variant on the inflation development is still unclear, said Smets, one could argue in both directions. It could be that the situation in China, for example, will lead to a prolongation of the supply bottlenecks and thus keep inflation high for longer. However, for monetary policy, the central bank is supposed to “look through” all the current volatility.

Michael Hüther, the director of the German Economic Institute, said that in the near future inflation rates will at least have to be expected to be higher than those of the past few years. In addition to the consequences of climate policy, Hüther also named macroeconomic changes on a global level as possible causes: Among other things, globalization, which has played a price-pressing role in the past, may no longer play this role in the future.

He could agree with ECB representative Smets on some points - but not on all, said Holger Schmieding, chief economist at Bankhaus Berenberg. The currently high inflation is characterized by numerous special factors. At some point, these fell out of the inflation calculation again, one could at most argue whether sooner or later. It will not happen like in the 1970s with very high inflation.

However: In his view, it is not realistic that inflation rates will fall as sharply as the ECB expects.

"In 2024, the inflation rate will not be 1.8 percent, but somewhere over 2 percent." In this sense, inflation "is here to stay".

Schmieding sees three main reasons for this: Solid demand, the inflationary consequences of the green transformation and an expected response from wages.

"The labor markets in Europe are reacting more slowly than in America because they are more regulated, but they will react," said the economist.

"Inflation will settle somewhere above 2 percent if the ECB does nothing." From his point of view, there is no longer any situation in which the central bank would have to artificially stimulate demand.

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