Nagel on ECB optionality, energy shocks, and AI (with Francine Lacqua)

Asks whether second-round effects from energy shock are here to stay longer than expected.

Francine Lacqua

Joachim Nagel

Too early to make such a call. June hike was necessary based on data at the time. Energy prices have retreated surprisingly to pre-crisis levels; need to see if sustainable. July and September meetings are an open race.

Many experts predicted energy would stay elevated, but it came down. Data-dependent approach remains best in uncertain times.

Asks if next hike is an insurance hike.

Francine Lacqua

Joachim Nagel

It was never an insurance hike. Lagarde and I confirmed: we did what we had to do to fulfill our mandate. Inflation will remain high this year and above target next year with high probability.

Geopolitical situation still uncertain; some good news from Middle East but we have to wait.

Asks what data he needs to decide on a July vs September hike.

Francine Lacqua

Joachim Nagel

First-round effects are significant. If they stay long, probability of second-round effects is high. We must concentrate on bringing inflation down. I will not speculate on future rate hikes; optionality open for July and September.

Data-dependent approach, meeting by meeting, is the best way to conduct monetary policy in these uncertain days.

Asks what specific inflation gauges he looks at more than before.

Francine Lacqua

Joachim Nagel

It's not just energy prices; we see first signs in chemical industries. Things can change daily. The peace arrangement between US and Iran is of utmost importance — we need certainty and peace for the inflation front.

Too early for conclusive interpretation of the whole situation.

Asks about wage expectations.

Francine Lacqua

Joachim Nagel

Different from 2022 Russia-Ukraine shock. Energy prices then went up dramatically with immediate wage reaction. This time not the case. But if first-round effects are robust, probability of second-round wage effects increases. At the moment I don't see such a risk.

Asks how difficult it is to get a real picture given daily changes in ceasefire/negotiations.

Francine Lacqua

Joachim Nagel

Real picture is very difficult to assess. Many expert opinions on production capacities, destruction, revitalization timelines. Too early. I check news daily, collect data, find more reliable information for long-run impact.

Asks what worries him most about the economy and whether transmission mechanism of June hike will be longer than previous cycles.

Francine Lacqua

Joachim Nagel

The main driver is uncertainty. Many investments and consumption are on the sidelines. We must overcome uncertainty. For Germany, Bundesbank forecasts 0.5% this year, 0.8% next, 1.4% after — okay numbers but more can be done to boost growth.

Asks about Bundesbank managing pension funds.

Francine Lacqua

Joachim Nagel

Good news: Germany has pension reform with convincing expert recommendations. Bundesbank already manages pensions for some German states. We have knowledge and expertise, so we are applying. Hope to start by beginning of next year. Strong signal for German and European capital markets.

Important to reduce fragmentation of European capital markets and crowd in private capital. Signal that we understand what we have to do to become more competitive.

Asks about AI — inflationary short-term, deflationary long-term?

Francine Lacqua

Joachim Nagel

Could be. First round AI could be more inflationary because you have to buy necessary hardware. Later stage productivity may kick in — first signs this is happening. AI is a disruptive technology. Good chance for Europe and Germany — we have data-rich companies. AI brings more productivity, new jobs, new opportunities.

We should take advantage of AI and use it in the best way.

Asks about Kevin Warsh's reception at Sintra.

Francine Lacqua

Joachim Nagel

I talked to him. He was warmly welcomed by his new colleagues. He is an excellent central banker. I look forward to hearing what he will say this afternoon. Important to have such cooperation between central banks.

We are doing what is necessary for Europe to keep prices on track; he will do the same for the United States.

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