The Bundesbank is committed to a stable currency. We entered 2023 with inflation rates of over 8% in the euro area. With that as our starting point, our New Year’s resolutions practically wrote themselves. From the outset, the key monetary policy task of the year was clear: to curb the high inflation. Over the course of the year, inflation rates came down significantly, falling to just under 3% at last report. Although that is still higher than the medium-term target of 2%, the trend is encouraging.
Lower energy prices were the primary reason for the decline, but decisive monetary policy action also played a part. Between July 2022 and September 2023, the Governing Council of the ECB raised its key interest rates by a total of 450 basis points, the strongest increase in the history of monetary union. We are on the right path, but have not yet reached the finish line. I shall therefore remain steadfast in my commitment to price stability.
Given the large bond holdings and high deposits, the sharp rise in interest rates is currently placing considerable financial burdens on the Bundesbank: we are paying higher interest rates on commercial banks’ deposits whilst at the same time generating only a low level of interest income from existing bond portfolios. In 2023, our financial buffers offset the losses incurred. As from the current year – 2024 – our financial buffers will likely no longer suffice. In that case, we will report a loss carryforward. This loss carryforward, however, will not prevent us from fulfilling our monetary policy mandate as part of the Eurosystem. The Bundesbank will continue to firmly advocate for price stability. That is something people can rely on. Their trust is our most important asset.
For 25 years, the euro has been our single European currency. In order to continue to meet the needs of Europeans in the future, we are evolving the euro. Digital payments are becoming more and more popular. A digital euro would therefore be a logical and important complement to cash. In 2023, the Governing Council of the ECB decided to start preparatory work for a digital euro. I am convinced that the digital euro will be a key topic for the future, and that the Bundesbank can play a leading role in shaping it. Internally, we have set the strategic course accordingly. The new strategic direction is part of a major modernisation process at the Bundesbank that will preserve our ability to perform our tasks in the best possible way now and going forward.
Evolving the Bundesbank into a future-proof, agile and digital organisation is a joint task for all who work at the Bundesbank. I am very pleased to share this endeavour with such excellent and committed fellow Bundesbankers. On behalf of the entire Executive Board, I would like to warmly thank our entire staff for their magnificent efforts!
Dr Joachim Nagel President of the Deutsche Bundesbank
