Unusually high inflation continued to shape the setting in 2023. However, the global wave of inflation eased markedly over the course of the year. This wave had been set in motion by the fallout from the COVID-19 pandemic and the economic policy responses to it and intensified by Russia’s war of aggression against Ukraine. 1 In many places, it led to the strongest price increases in decades. Wage growth also accelerated considerably in response to the high inflation rates. This in itself helped push prices up further, particularly in the services sector. Moreover, some enterprises expanded their profit margins in the high inflation environment.

In the industrial countries, consumer price inflation stood at 7.8% on average in 2022 and still amounted to 4.9% in 2023. One major reason for the easing of inflation was the decline in energy prices, which had previously risen sharply. Core inflation, which strips out energy and food prices, also subsided in 2023. Having reached 5.2% in 2022, it still stood at 4.8% in the reporting period. 

The global economy expanded moderately last year. One of the reasons was the high level of inflation, which dampened private consumption. Moreover, the tightening of monetary policy in many regions slowed economic growth. However, there was no recession, not least because labour markets were robust. Nor was there any lasting impairment to the financial sector; intermittent turbulence in the spring had no noticeable impact on global economic activity. 

According to the projection published by the International Monetary Fund (IMF), the global economy is expected to have grown by 3.1% overall last year, compared with 3.5% in 2022. Global economic activity is set to expand at the same pace this year, with inflationary pressures likely to weaken further. Downside risks to the global economic outlook would emerge, in particular, if inflation did not ease as expected and the tight monetary policy stance had to be sustained for longer than currently assumed. Other risks are posed by the possible continued faltering of growth in China, a potential escalation of the conflicts in Ukraine and the Middle East, and geopolitical tensions in other regions of the world. 

These uncertainties underline the importance of maintaining cooperation through international organisations. The decision to increase the financial resources of the International Monetary Fund in December 2023 is aimed at helping to achieve this; see the section entitled “The International Monetary Fund’s own financial resources are being augmented on a lasting basis”. This measure is an important element in ensuring future global financial stability. 

2023 was a challenging year for the German economy. In addition to the after-effects of the sharp rise in energy costs, weak foreign demand weighed on industrial output. Moreover, high inflation depressed private consumption. High wage increases therefore did not yet lead to a marked rise in consumption expenditure. The Eurosystem’s tighter monetary policy also curbed economic activity. Increased financing costs dampened investment, particularly in housing construction. Finally, government consumption fell sharply in the absence of pandemic-related expenditure on items such as vaccination and testing. 

On the other hand, the normalisation of supply chains, the high order backlog in industry and construction and the still stable labour market bolstered activity. According to preliminary data from the Federal Statistical Office, German economic output, measured in terms of price-adjusted and calendar-adjusted gross domestic product (GDP), fell slightly last year by 0.1% on the year. Borne mainly by more buoyant export activity and a pick-up in private consumption, aggregate output will return to an expansionary path this year, rising by 0.4% according to the Bundesbank’s December 2023 forecast. 

Inflation in Germany as measured by the Harmonised Index of Consumer Prices (HICP) surpassed its peak in October 2022. Driven by falling energy prices, it has weakened considerably since then. Headline inflation in Germany came to an annual average of 6% in 2023, down from 8.7% in 2022. Core inflation, on the other hand, climbed from 3.9% in 2022 to 5.1% last year. According to the Bundesbank’s December forecast, headline inflation in Germany is likely to decline further to 2.7% this year and core inflation to 3%. 

The euro area economy, too, lost momentum last year. High inflation held back private consumption. Weak foreign demand weighed on industry. In addition, many of the support measures adopted in the wake of the pandemic and the energy crisis expired. Last but not least, the rise in financing costs also curbed the pace of growth. Overall, real GDP growth slowed from a calendar-adjusted average of 3.4%  in 2022 to 0.5% in the reporting period. According to the latest Eurosystem projections, the euro area economy could expand somewhat faster in 2024, at 0.8%.

Price pressures in the euro area eased significantly last year. As was the case for Germany, this was driven primarily by a marked decline in energy prices. Headline HICP inflation in the euro area came to an average of 5.4% in 2023, down from 8.4% in 2022. By contrast, core inflation in the euro area rose from 3.9% in 2022 to 4.9% last year. It will still be some time before inflation returns to the target rate of 2%. According to the Eurosystem's latest outlook for prices and costs, HICP inflation will still come to 2.7% this year. Only in 2025 will inflation be close to the inflation target rate, at 2.1%. Core inflation will stand at 2.7% this year and 2.3% next year. 

Given the strong and persistent price pressures in the euro area, the Governing Council of the ECB continued to tighten its monetary policy in 2023, a process it had begun in 2022. Extensive measures were taken to ensure a timely return of inflation to its 2% target; for more details, see the Chronology of monetary policy decisions. These measures affected the key interest rates, in particular, but also the asset purchase programmes. After the Eurosystem ended net asset purchases under the pandemic emergency purchase programme (PEPP) and asset purchase programme (APP) in 2022, it also scaled back reinvestments of principal payments from maturing securities purchased under the APP from the beginning of March 2023, discontinuing APP purchases altogether at the end of June 2023. 

With regard to its interest rate decisions, the Governing Council of the ECB announced that it would not decide in advance on a specific interest rate path, but would take a meeting-by-meeting approach based on the incoming economic data instead. Given the persistently unfavourable price outlook, the Governing Council of the ECB raised key interest rates six times in a row in 2023; by 0.5 percentage point each in February and March, and by 0.25 percentage point at each of the next four monetary policy meetings. As a result, the interest rate on the deposit facility, which is currently the most relevant monetary policy interest rate, rose to 4%. The Governing Council of the ECB thus carried out the largest and steepest sequence of interest rate hikes in the history of the Eurosystem, totalling 4.5 percentage points in just over a year. The interest rate hikes decided by the Governing Council pushed up the cost of financing for households and enterprises, thus dampening aggregate demand and helping to ease high price pressures.

In the light of declining inflation rates, the Governing Council of the ECB decided at its October monetary policy meeting not to raise interest rates any further for the time being. This decision was informed by the Council's assumption that current interest rates were at levels that, maintained for a sufficiently long duration, would make a substantial contribution to achieving the price stability target. At its last monetary policy meeting of 2023, the Governing Council decided to keep interest rates on hold. However, it did not rule out further interest rate hikes if required by the price outlook. In order to ensure a timely return to price stability, the Bundesbank believes that the monetary policy stance should not be loosened too early. 

Tighter monetary policy affects not only the cost of financing for households, enterprises and general government, but also the central bank’s balance sheet. Since the latest round of monetary policy tightening began, the Eurosystem’s balance sheet has contracted by around one-fifth, or just over €1.8 trillion in absolute terms. This was mainly because a large volume of targeted longer-term refinancing operations (TLTROs) matured or were repaid early by euro area banks. The ECB Governing Council’s adjustment of the previously very favourable interest rate conditions for this type of refinancing operation provided incentives for early repayments from the end of November 2022 onwards. The reduction of the balance sheet was supplemented by the discontinuation of reinvestments under the APP. The Governing Council decided that, from the second half of 2024 onwards, maturing securities under the PEPP will no longer be reinvested in full; by the end of 2024, it intends to discontinue purchases under the PEPP altogether.

The monetary policy tightening that commenced in 2022 shrank more than just the Eurosystem’s balance sheet. The profitability of euro area central banks also deteriorated significantly as a result of the rise in key interest rates. The Eurosystem’s holdings of bonds are predominantly long-term investments, whose relatively low returns have so far been largely unaffected by the interest rate reversal. By contrast, the interest rate hikes directly increase the Eurosystem’s interest expenditure, as banks are paid higher rates on their deposits with central banks. It was for this reason that the Bundesbank already reported a result of zero in its profit and loss account for 2022. In 2023, the tight monetary policy stance once again weighed on the Bundesbank’s profitability; see the section entitled “Interest rate risk on the central bank balance sheet”.

Public finances in Germany improved last year. The government deficit ratio fell from 2.5% in 2022 to 2% in 2023. The government debt ratio reached 64.8% in the third quarter of 2023, compared with 66.1% at the end of 2022. Public finances benefited from the gradual phasing out of the temporary COVID-19 support measures. This outweighed the mounting burdens presented by the likes of the support measures related to the energy crisis, defence, higher interest expenditure or unfavourable economic developments. However, excluding temporary crisis measures and cyclical effects, the deficit has risen.

The ruling of the Federal Constitutional Court of 15 November 2023 strengthens the binding effect of the debt brake. 2 This specifies, in particular, that emergency loans must not be transferred into special funds for use in future fiscal years. The ruling relates to central government, but is also relevant to state governments. The Bundesbank pointed out constitutional risks to budgetary and financial planning in this respect. 3 Having numerous, large-scale off-budget entities may impair the transparency and monitoring of public finances. 4 Ultimately, only binding fiscal rules can ensure sound public finances. But this does not preclude a stability-oriented reform of the rules. 5

The deficit ratio will continue to decline this year and next, with the debt ratio thus likely to continue to approach 60%. The deficit ratio is falling because temporary energy crisis measures are expiring, especially this year, and because adverse cyclical factors will subside over the course of the year. In structural terms, however, the deficit ratio will probably continue to rise. Expenditure on defence is likely to grow, in particular. This will be compounded by other burdens, such as the abolition of the renewable energy (EEG) levy, collective labour agreements and rising pension payments. How central and state governments adapt their plans to the Federal Constitutional Court ruling remains to be seen, especially for 2025.

Last year, public finances in Germany and the EU were still heavily influenced by the energy crisis, to begin with. Central governments continued to provide substantial support to households and enterprises. Given the bottlenecks in the supply of energy, it was particularly important that such assistance measures entailed incentives to save energy – in Germany, for instance, these incentives were successfully incorporated into the energy price brakes. Generally speaking, it would have been beneficial to direct the measures more precisely towards those in need. This would have weighed less heavily on public finances, helping to make monetary policy more effective in curbing inflation. 

Despite the easing of the energy crisis, Germany and the other euro area Member States face fiscal challenges. These include the foreseeable rise in the interest rate burden, the fallout from geopolitical conflicts, the decarbonisation of the economy and demographic developments. Sound public finances will be key to successfully overcoming these challenges. They also facilitate stability-oriented monetary policy. Credible fiscal rules will help to maintain confidence in sound public finances. 

The existing EU fiscal rules have not been sufficiently firm in promoting sound public finances. Several Member States have very high debt ratios, some well above 100%, and high deficit ratios that are significantly in excess of 3%, even without crisis measures. Last year, there was intense debate about a reform of the fiscal rules, with the Bundesbank also putting forward stability-oriented proposals. On 20 December, the Economic and Financial Affairs Council (ECOFIN) agreed on changes to the rules. 

From the Bundesbank’s point of view, the reform does not remedy the main weaknesses of the existing rules. It is important to implement the reformed rules sufficiently stringently that high debt ratios do actually fall rapidly and deficit ratios reach sustainable levels. In this context, it is helpful for the procedure for a deficit ratio above 3% to remain essentially unchanged, even after the reform. The new rules agreed by ECOFIN also include other essential targets and objectives, such as the safety margin with regard to the 3% ceiling. Whether the targets are achieved, however, depends on plans that are intended to be in place for many years and which are strongly assumption-based. Another concern is that each Member State should negotiate its fiscal plan bilaterally with the European Commission. In addition, there is still discretionary scope to ease the rules in many areas. Unfortunately, this reform will not make the EU fiscal rules any simpler or more transparent. This will place the onus for implementing them strictly all the more firmly on the European Commission and ECOFIN.

The banking turmoil in the United States and Switzerland in the spring of 2023 caused significant stress in terms of its scale and scope. In the United States, several regional banks had to be liquidated in March of last year after interest rate and liquidity risk materialised. 6 In Switzerland, years of mismanagement at Credit Suisse – in particular deficiencies in corporate governance, business strategy and risk management – ultimately resulted in the bank being taken over by UBS. In response to these events, the Basel Committee on Banking Supervision (BCBS) published a report highlighting the importance of “full and consistent” implementation of all elements of Basel III in all member jurisdictions. It also announced that it would review the functioning of individual regulations. These include liquidity standards, the treatment of interest rate risk, the role of additional tier 1 (AT1) instruments and the scope of application of Basel III. The Financial Stability Board (FSB) also published a report highlighting potential areas in which the resolution framework could be improved.

At the beginning of December of last year, EU legislators agreed on a legislative text to implement the internationally agreed Basel III reforms in the European Union. The revised EU banking package (Capital Requirements Regulation and Capital Requirements Directive, CRR/CRD) will increase banks’ resilience and strengthen their supervision and risk management. In particular, the Basel III reforms aim to make the way banks calculate their risks more transparent and comparable.

In addition to implementing the Basel III reforms, the revised EU banking package contains various other issues that should be seen as responses to current challenges. One example is the harmonisation, as a consequence of Brexit, of EU supervision of third country banks’ branches in the EU. In addition, banking regulation will now incorporate environmental, social and governance (ESG) risks. 7 The final legal text has yet to be formally adopted by the European Parliament and the Council. Publication in the Official Journal of the EU is expected in the spring of 2024. The new CRR rules will then apply from 1 January 2025, and the new CRD provisions will have to be transposed into national law by the specified deadlines.

The macro-financial environment in 2023 was challenging for the German financial system: the historically sharp rise in interest rates marks a turning point. In addition, economic developments in Germany were subdued. Moreover, the structural change ahead requires adjustments not merely in the real economy but also in the financial system. The transition to net zero, demographic developments and the increasing digitalisation of all areas of life, in particular, will involve fundamental change.

So far, the German financial system has proved stable, but adjustment to the new macro-financial environment is not yet complete. Last year, net interest income buoyed profitability in the banking sector. Whether net interest income comes back down again in 2024 will depend on how banks’ interest income develops in relation to their interest expenditure. For instance, lower loan demand makes it more difficult to offset rising interest costs with higher interest rates on new loans. Higher financing costs and lower credit growth are intended monetary policy effects. This is a necessary interim step in order to dampen aggregate demand and thereby price pressures. Given the sharply higher lending rates and weak economic activity, the risks associated with loans to enterprises are likely to increase in the coming quarters as individual enterprises’ debt sustainability declines. Some firms are already experiencing heightened default risk, particularly in the commercial real estate sector.

The financial system has to be resilient enough to cope with increased risks and heightened uncertainty. Besides real economic and financial risk, this also includes operational risk, such as, for instance, cyber risks. In view of potential future strains, banks should use their currently good earnings situation to further shore up their resilience. Overall, the package of macroprudential measures adopted in 2022 continues to make an important contribution to making the banking system more resilient. 8

Commensurate with the risk situation, the Federal Financial Supervisory Authority (BaFin) and the Bundesbank have defined supervisory priorities as part of the National Supervisory Programme 2024-26. Four areas are of particular relevance for institutions under national supervision this year: first, the economic environment and high inflation; second, interest rate developments; third, IT security; and fourth, the commercial real estate market. Priorities set under the Single Supervisory Mechanism (SSM) were also taken into account. In the medium term, the National Supervisory Programme also incorporates other supervisory priorities: digital transformation in conjunction with demographic change, governance, and climate change, sustainability and economic transformation.

Cash remains the most commonly used means of payment in Germany. In a study, 93% of respondents agreed that they would, in future, like to continue to have the option of whether to use cash or a cashless method wherever they make a payment. 9 Demand for banknotes increases especially in times of emergency and crisis. With geopolitical crises on the rise, it is therefore particularly important to ensure a reliable supply of cash. “Secure cash supply – even in a crisis” was thus the title of a symposium hosted by the Bundesbank in Berlin in June 2023. The particular importance cash holds over and above its function as a pure means of payment was discussed. 

The Bundesbank will continue to promote an exchange of ideas on issues relating to cash. In February 2024, it organised the inaugural National Cash Forum. The purpose of this forum is to give participants in the cash cycle the opportunity to exchange information on developments in cash in an ongoing and structured manner. A functioning cash cycle requires, amongst other things, a network of cash sources, which must also be able to cope with spikes in demand. Credit institutions’ branches and ATMs play a very prominent role in supplying the population with cash. Currently, however, cash is also increasingly being withdrawn at the point of sale.

Another issue is the sustainability of cash. The Bundesbank has participated in a Eurosystem study on the sustainability of banknotes. On the basis of the insights the study provided, the Bundesbank will strive to render the cash life cycle even more sustainable going forward.

The Bundesbank is also involved in the Eurosystem’s project to develop a third series of euro banknotes. Two Europe-wide surveys ascertained public preferences on possible themes for the new euro banknotes. German consumers took part in particularly large numbers. Based on the results of the two surveys, the Governing Council of the ECB decided to move forward with “European culture” and “Rivers and birds” as possible themes for future euro banknotes. The ECB is expected to decide in 2026 on the final designs of the new banknotes and on when to produce and issue them. 

Despite the continued importance of cash, the share of cashless payments has edged up over the past few years. 10 Especially during the COVID-19 pandemic, consumers paid more frequently using electronic payment methods such as cards or smartphone payment apps. In Germany, for example, the girocard procedure has moved forward considerably. Instant payments are also likely to become increasingly established in conventional retail outlets and in e-commerce. EU law will, in fact, require all banks effecting payment transactions to offer instant payments from 2025 onwards. The Bundesbank expressly supports the Eurosystem’s call for a private digital payment solution that can be used throughout Europe. Progress was made in 2023 with the European Payments Initiative (EPI), which is supported by a large part of the German banking industry. A first workable product is expected for 2024.

The desire to preserve the anchor role of central bank-issued currency in the digital world is one reason for the increasingly strong interest in central bank digital currencies (CBDCs) around the world. 93% of the central banks surveyed worldwide reported in a survey conducted by the Bank for International Settlements that they were looking at CBDC. 11 There are two forms of CBDC and the Eurosystem has projects dedicated to both of them, with the Bundesbank closely involved in both.

Wholesale CBDC is intended for transactions between commercial banks. The question the Eurosystem is looking at here is how financial market participants can securely settle the cash leg of transactions in central bank currency if assets are held and transferred using distributed ledger technology (DLT) or on blockchain platforms. With DLT, the centralised databases currently used for the transfer of cash and assets would be replaced by a decentralised network. In April 2023 the Governing Council of the ECB decided that conceptual considerations should be followed in 2024 by a trial period with interested market players in order to gain a better, practice-based understanding. Alternative approaches besides the issuance of CBDC are also being discussed. For example, the Bundesbank will bring to the table its trigger solution, which provides a bridge between the DLT approach and the TARGET payment system. 

Retail CBDC is defined as default-free and risk-free digital central bank money for households and enterprises. In this context, the Eurosystem launched the digital euro project in 2021. Last year, the project entered the preparation phase; see the section entitled “A digital euro for everyone”.

Last year, the Bundesbank also participated in other major projects to enhance the cashless payment infrastructure. The Eurosystem’s new TARGET platform went live in March 2023. It consolidates the technical and functional features of TARGET2 in payments and TARGET2-Securities (T2S) in securities settlement. Credit institutions and market infrastructures such as central counterparties benefit from various improvements offered by the new TARGET platform relating to, say, liquidity management, cost efficiency and resilience to cyberattacks.

In addition to consolidating TARGET2 and T2S, the Eurosystem has also moved forward with the Eurosystem Collateral Management System (ECMS), which will constitute a unified Eurosystem platform for managing monetary policy collateral. Project work on the ECMS entered the user test phase in the summer of 2023, with the Bundesbank supporting its counterparties intensively. The “ECMS Customer Forum – User testing”, which was set up in September 2023, has an important role to play in this context. It allows participants to exchange ideas and to share test experiences on a regular basis. In November 2023, the Governing Council of the ECB decided to reschedule the launch of the ECMS from April to November 2024 in order to give all stakeholders sufficient time to prepare. 

Cyberattacks are an increasing challenge for German financial sector enterprises. To test the resilience of particularly significant financial industry enterprises to cyberattacks, the Bundesbank employed TIBER-DE (Threat Intelligence-Based Ethical Red Teaming) again in 2023. Hacking exercises were used to attack companies and expose any vulnerabilities in their IT infrastructure. This allows businesses to identify protective measures in need of further improvement. The TIBER approach has proved very useful in Europe and has been incorporated into the European regulation on digital operational resilience for the financial sector, in the Digital Operational Resilience Act (DORA). DORA prescribes mandatory threat-led cyber tests for important enterprises as of 2025. The Bundesbank will continue to provide operational support to enterprises in the German financial sector and support them in their efforts to improve their cybersecurity.

The Bundesbank itself must also avert cyberattacks, and such attacks actually increased significantly last year. In particular, there was a general rise in ransomware and distributed denial-of-service attacks against financial market infrastructures. 12 In order to address the ever more technically sophisticated attacks, the Bundesbank stepped up its efforts to further strengthen the resilience of its IT infrastructure and to equip it for future challenges.

In response to the current challenges, the Bundesbank has stepped up its interaction with policymakers. It opened a representative office in the newly founded House of the Euro in Brussels, thereby strengthening the Bundesbank’s foreign network. The ECB and national central banks are working closely together there to ensure Eurosystem positions are included in European discussions at an early stage. The Capital City Reception, which takes place once a year, is an opportunity to engage with policymakers in Berlin. Last year, it again brought together many high-ranking representatives from the spheres of banking, associations, government ministries and academia as well as numerous members of the German parliament. The dialogue with civic organisations that began in 2020 when the Bundesbank reviewed its monetary policy strategy has also become an established annual event in Berlin.

Moreover, the Bundesbank further expanded its dialogue with the general public in 2023. It did so using both tried-and-tested and new formats. For the first time, the Bundesbank was present at the digital society festival “re:publica 23” in Berlin with an information stand, numerous lectures and discussion rounds. Established communication and education formats were successfully continued. In 2023, more than 16,000 people attended the Bundesbank’s open days in Hamburg and Munich to learn more about the Bundesbank’s tasks in a fun and engaging way. The Bundesbank was also involved in the festivities to celebrate German reunification in Hamburg, presenting an exhibition on the history of German monetary union that attracted thousands of visitors. Meanwhile, visitor numbers at the Bundesbank’s Money Museum in Frankfurt am Main returned to their high pre-COVID levels. The museum was also a key contributor to the exhibition “Inflation 1923. War, Money, Trauma” that ran at the Historical Museum Frankfurt from May to September 2023.

Last year, the Bundesbank also expanded its digital media offerings. Numerous Bundesbank events were streamed live on the internet. These included the Bundesbank Invited Speakers Series, a new series of talks organised by the Research Centre featuring international guests from academia and from the scientific community. The range of digital materials and new media formats on offer for economic education has also been continuously expanded. The Bundesbank e-book “Understanding money” (Geld verstehen digital) was awarded the prestigious Comenius-EduMedia medal. The e-book features a diverse mix of media and interactive applications and answers everyday questions on all things money-related.

The Bundesbank also set its course for the future in areas other than information technology. As part of a comprehensive modernisation programme dubbed “Wandel” (Change), it is realigning its strategy and steering capacity. This process includes a review of its organisational structure and leadership culture. The aim is to allow an even faster response to complex and changing requirements going forward and to help the Bundesbank fulfil its role as an important and formative partner within the Eurosystem and in European banking supervision as best as possible. The desired changes are to be implemented by the end of 2027. Amongst other things, this includes improving the conditions for data analysis and comprehensively addressing sustainability issues. With a view to meeting the first objective, the role of Chief Data Officer was newly created in April 2023, while the second objective was addressed by the creation of a cross-sectional division, details of which are given in the section entitled “Bundesbank enshrines sustainability as a cross-sectional issue”, which also takes a look at selected work on sustainability-related issues.