The ‘energy crisis is solved’ and the German economy is safe, Bundesbank’s Nagel says

German central bank president says Europe's energy crisis is over

He asserted that Germany's progress in diversifying its liquefied natural gas supply away from Russia, and its increased storage -- resulting from built up capacity during the mild winter -- meant the country's economy is well placed to weather the next cold season as well.

The latest available purchasing managers' index readings showed German manufacturing, which accounts for around a fifth of the country's economy, experienced its sharpest fall in activity for almost three years in March and hit its lowest level since May 2020.

However, Nagel claimed that this was down to lingering effects of the Covid-19 pandemic and Russia's war in Ukraine, insisting that "we shouldn't forget where we came from."

"The German industry has a good capability to deal with the situation, there is this inherent strength of the German economy, and I believe they will overcome this, and they will go back to the levels we saw before the pandemic," he said.

The European Central Bank hiked interest rates by another 50 basis points in March to bring its main rate to 3%, as the continent continues to grapple with high inflation.

Headline inflation across the euro zone fell to 6.9% in March from 8.5% in February, driven by cooling energy costs. But core inflation -- which strips away volatile food, energy, alcohol and tobacco prices -- increased to an all-time high of 5.7%.

Nagel said the persistence of high core inflation showed the ECB Governing Council, in which he is considered one of the more hawkish members, has further to go in tightening monetary policy.

He expects core inflation to eventually follow the headline figure downwards, but reiterated that policymakers have to "stay really alerted when it comes to the inflation story."

"What is also important to me, we went through some financial market turbulence uncertainty over the last five weeks and now we have to find out what was the impact out of that, and we have to wait for the incoming data until we have our next meeting in May, and then we will see," he said.

Financial markets were roiled in March by concerns about the banking sector. The collapse of U.S.-based Silicon Valley Bank early last month triggered contagion fears that eventually took down several U.S. regional lenders and led to the emergency rescue of Credit Suisse by fellow Swiss giant UBS.

The ECB went ahead with a 50 basis point hike to interest rates despite concerns about the economic impact of the banking turmoil, and Nagel hopes this sent an important message to markets.

"There is no contradiction between what we have to do on the price stability side and on the financial stability side," he said.

"We have different instruments to tackle the price issues and the financial stability issues, so it was an important message to the financial market participants that we are very committed when it comes to fighting against inflation."