In view of the extremely high inflation, Deutsche Bank boss Christian Sewing calls for resolute countermeasures in monetary policy. He assumes that the German economy has enough resilience to cope well with the expected recession, Sewing said on Wednesday at the start of the "Handelsblatt" bank conference in Frankfurt. "But that requires central banks to act quickly and decisively now." The Governing Council of the European Central Bank (ECB) is convening for its next regular meeting this Thursday (September 8th). The central bank is under great pressure to significantly increase interest rates in the euro area.
In Europe's largest economy, Germany, the annual rate of inflation jumped back to 7.9 percent in August. Inflation in the euro area climbed to a record high of 9.1 percent in August, driven by rising energy and food prices. Economists expect a further increase in the coming months.
In the medium term, the ECB is aiming for a stable price level with annual inflation of two percent for the common currency area. Sewing does not expect inflation to fall quickly: "We have to adjust to higher inflation in the long term." The inflation target of two percent will probably “only be approached in the second half of 2024, before that it cannot be achieved,” said Sewing.
Warning of social upheaval
"Many people can still draw on their savings to deal with higher prices - and many companies are still adequately funded. But the longer inflation remains high, the greater the pain and social dynamite," warned Sewing.
Sewing, who is also President of the Association of German Banks (BdB), sees the financial sector in Germany as well prepared: "Today we are much more stable and resilient than we were ten years ago." Even in the difficult first half of 2022, the industry hardly lost any profit and increased its earnings. "We will certainly see a higher number of insolvencies, we will certainly see higher loan defaults this year as well. But everything within a framework that I think is manageable." The industry has taken good precautions, said Sewing.
The president of the financial regulator Bafin, Mark Branson, summed up: "At the moment the loan books are fundamentally healthy." The key question is according to which standards financial institutions grant loans. "The banks have really become more cautious," said Branson. At the same time, Branson emphasized: "It is absolutely the time to act cautiously." As financiers of the economy, banks are also there to "take risks, banks are also there to suffer credit losses". Money houses have to be managed in such a way that not every loan default is a disaster, said the head of the Federal Financial Supervisory Authority.
