As here at the G7 summit this year, the Federal Minister of Finance and the President of the Bundesbank are pulling together at the IMF conference.
(Photo: Reuters)
Washington At the annual conference of the International Monetary Fund (IMF), Federal Finance Minister Christian Lindner (FDP) and Bundesbank President Joachim Nagel announced joint action to combat persistently high inflation. The Bundesbank now expects inflation to be over seven percent in the coming year – and thus significantly more than the European Central Bank (ECB) has set as its target.
It was an unusual setting for Lindner and Nagel to hold their joint press conference at the IMF Annual Meeting. They were sitting on a pedestal in the middle of a room in Washington’s Fairmont Hotel on Thursday, with a chandelier above them. “Almost like a wedding,” said Lindner. In these difficult times, fiscal and monetary policy must work “hand in hand,” “but we remain unmarried.”
The joint action of finance ministers and central bank governors in the fight against inflation and economic weakness is nevertheless the central topic at the IMF annual meeting. Governments and central banks have to step on the brakes to curb runaway inflation – but this is further weakening the economy.
Further rate hikes are to be expected
From the point of view of Lindner and Nagel, however, this has to be accepted. “Fighting inflation is our top priority,” said Lindner. After all, inflation is “the greatest threat to our economic foundation”.
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The cooling of the economy should be as small and as short as possible, said Nagel. However, persistently high inflation is “the greatest destroyer of prosperity”. The Bundesbank is anticipating inflation of over eight percent this year. And in the coming year – contrary to what was hoped for recently – it won’t be that much better. “I’m counting on a seven before the decimal point,” said Nagel.
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The Bundesbank has thus once again raised its inflation forecast. The federal government and the IMF have also had to adjust their estimates upwards on a regular basis. Lindner and Nagel called for a determined fight against inflation. “In such a situation, monetary and fiscal policy must be allies,” said the Bundesbank President.
The ECB recently raised interest rates, albeit less drastically than the US Federal Reserve. “The Governing Council acted decisively,” said Nagel, “further interest rate hikes are necessary.” He did not name an order of magnitude, speaking of a “robust rate hike”.
At the same time, the federal government should play its part in the fight against inflation. The planned gas price brake could contribute to this. Nagel said the measure could dampen inflation, but declined to predict how much.
IMF warns against loose spending policy
In addition to state intervention to cap prices, the government can also try to curb inflation by cutting government spending. The IMF recommends that countries end their expansive fiscal policy. Lindner is also in favor of this. He justifies his insistence on complying with the debt brake in the coming year.
The International Monetary Fund warns against too loose a financial policy because of the highest inflation in decades. According to an analysis by the IMF, the budget deficits would have to be reduced in order not to further fuel inflation. This would send a strong signal that governments and central banks are moving in the same direction.
>> Read here: Government expects significantly less inflation in 2023 – gas and electricity price brakes should help
In Washington, ECB boss Christine Lagarde also called for “greater cooperation between monetary and fiscal policy” in order to be able to master the crises in the global economy. “During the pandemic it was a lot easier than it is today,” she said. Rate hikes remain the best way to fight inflation, Lagarde said.
“We expect energy prices to increase and stay high for a while,” Lagarde said. Gas is between six and ten times more expensive than in the United States. The head of the ECB also assumes that the 27 states of the European Union will coordinate their energy policy more closely and rely on “bundled energy procurement”.
More: IMF lowers economic forecast for Germany