Dombret: ECB on Hold for Now, Hard to Gauge Policy "Scenario" for War, Rate Hikes Possible
Former member of Deutsche Bundesbank Board says if energy price shock turns into food price shock, "central banks can't be looking through this"
Andreas Dombret has held a number of high level positions in the world of central banking, finance, and global consulting, making him uniquely qualified to look at all sides of the war in Iran, the oil price shock that is causing, inflation that is sure to rise around the world.
Notably, from 2010 to 2018, Andreas sat on the Board of Deutsche Bundesbank, the German central bank, with responsibilities for financial stability, bank supervision, financial markets and more. In this role he represented the German central bank at the International Monetary Fund (IMF), the Bank of Intl. Settlements (BIS), the OECD, the G7 and the G20 and many European bodies.
When Andreas joined me here at the IMF and World Bank he started by focusing on a world where suddenly the only thing certain for central bankers around the world is more uncertainty.
”Simply spoken, if you have a price at or above 100, dollar, a barrel for a long time, this is going to be very, very, very problematic, and it’s very unpredictable, he says.
”Now the volatility in the geopolitics is so high that nobody is daring to make a forecast because you can be so much off and you can be, you know, wrong tomorrow and right in two days and wrong again in three days. So nobody is really going to put down, a clear forecast.”
“So, it really depends on how long this conflict is going to last. But, right now, there is a lot of downside. I must say… a lot of downside.”
This uncertainty, he argued, makes it difficult for central banks and markets to chart a clear course.
“If you can’t look through the crisis, if you cannot look through the energy shock, and if this energy shock is actually going into a food price shock, which is likely to happen over time, then, central banks cannot be looking through this and will have to consider this” and may force then to act more aggressively than they would have preferred.
As for the European Central Bank, Andreas says are not pricing in an interest rate hike. “But this is all a bit too far away right now to really make assessments. I'm not expecting that the ECB will move at the next meeting, but…after that, <it will be> depending on how long this crisis will continue.”
Andreas says in an adverse scenario European inflation could hit 4%, and “in a real worse case scenario it can easily get to 6%.” Dive in and hear more about what he says about bigger picture issues including the global fragmentation that is Europe on many levels.
Uncertainty and forecasting entropy 00:01:19:01
It really depends on, how long this conflict, in Iran and this, energy price shock will continue. Simply spoken, if you have a, or price of, above 100, dollar, a barrel for a long time, this is going to be very, very, very problematic. And, it’s very unpredictable. Now the volatility in the geopolitics is so high that nobody is daring to make a forecast because you can be so much off and you can be, you know, wrong tomorrow and right in two days and wrong again in three days. So nobody is really going to put down, a clear forecast. So, it really depends on how long is this conflict going to last. But, right now, there is a lot of downside. I must say… a lot of downside.
Can you ‘look Through the oil price elevation? 00:02:15:13
That is you know, that is exactly it. If you can’t look through the crisis, if you cannot look through the energy shock, and if this energy shock is actually going into a food price shock, which is likely to happen over time, then, central banks cannot be looking through this and will have to consider this. So normally in a food price shock or energy price shock, you have the, you know, as you try to be steady in central banking, but if you can’t look through it and if things, get out of hand and, the impacts get too large, then you need to react.
No ECB hike at the next meeting 00:02:58:00
So right now, for example, in Europe, the markets are not pricing in any, increases in the, in the, in the policy rate for the next meeting, but very much for the meetings afterwards. But this is all a bit too far away right now to really make assessments. I’m not expecting that the ECB will move at the next meeting, but very well. After that, depending on how long this crisis will continue.
Worse case…Inflation may be headed for 4% in Europe 00:03:41:21
Now. Inflation is a worry. And especially if, you can’t look through it. And, this is not going to go back to normal in, in the foreseeable future. So we are talking, in an adverse scenario, for the eurozone about a four point something inflation rate far above the, you know, policy rate, the ECB has in mind.
Worst case 6%...easy 00:04:07:01
And then we, in a real worst case scenario, can easily go to 6%. So, we are having the potential I’m saying the potential of a shock which is similar to the pandemic shock where you couldn’t look through because you weren’t sure how long this would last.
A bigger drag from it if it drags on 00:04:54:05
And it will depend on how long this continues. If this is if we see light at the end of the tunnel, you can look through it. If you don’t see that and if, they’re even going to be more troops and more military action and higher prices and no solution to, you know, the Strait of Hormuz opening up, that will have a very negative effect on, energy prices. And this energy price shock will then continue into food price prices and, you know, fertilizers are involved, etc., etc.. So, so this is really, the worry going forward. We are not having any upside scenario. We are having, a downside scenario and the downside. So now we can be quite, quite large.
Too many unknowns to know 00:05:52:10
But with the rates are on the way up. I don’t know how quickly, but they are on the way up, especially if this crisis continues to loom as it does unfortunately right now. And, you know, I’m not quite sure what the scenario really is for this, a military conflict and what this means. And, I talk about this from a pure economic point of view, not from a humanitarian or political point of view.
Europe/Germany Open economies and short of energy 00:06:20:20
If this continues, it has immense effects and less so on the US, though, because the US is fracking, the US doesn’t have problems with energy. Produces most of it itself. But for, energy importing countries like the European countries, especially Germany, because we got rid of the nuclear power plants and that is, of course, an open economy, exposed to an energy truck.
Being a net energy importer makes a difference 00:06:51:16
Being a large energy importer, makes things much more difficult than you think. So the the likelihood of this being having a big impact on the US economy is not that much the case, but quite so on other economies, including European economies, including very much Germany.
Potentially erratic impacts on markets 00:07:24:03
Yeah. Do we. The issue is that, nobody wants to take sides and because you can be wrong, as I said at the beginning, if, if you don’t know what’s happening, and geopolitics are so volatile as they are and they really are volatile, then you’re not going to take a stance. And the only, so you’re going to see big jumps.
Market values ae not well-grounded 00:07:45:11
Yeah. You’re not going to see directional trades, but you’re going to see people going in and out all the time. So, of course this is a reflection of what people are thinking. It’s probably the best reflection of what people are thinking. But it is not directional. There is not the normal direction of a market. It is a market going to be very in quick response to news. And the news is very volatile.
Need cooperation and coordination with he US engaged 00:08:35:08
You know, I’m not trying to get political here, but, you know, whenever I looked at the markets and I was a G7 deputy, energy 20 deputy and an IMF see deputy, etc., etc., you know, if you deal in these organizations, without the US, you are nowhere. But if the US is the only part moving forward and doesn’t look at the others, it’s not going to work either.
The US has lost some traction but is still extremely important 00:09:04:23
So you need some sort of a core, especially in the G7, but also in the G20 and mostly at the IMF. So the role of the United States, of course, is going down. That was, by the way, intended when the IMF was built, because I said over time, emerging economies are going to get stronger and the US is going to get somewhat weaker.
That was the intention and the entire build up of the IMF. And that is the case. But still, the US is by far the most important, economy. And I’m a representative of Germany, and we are t e third largest economy in the world. And I can tell you that is, we were far behind the US. You cannot bet against the US.
Hard to have strategy that leaves the US out…00:09:51:00
So to have a to have a strategy leaving the US out is very difficult. But for the US saying we are the only party moving and we’re leaving the rest out is also no longer working. So it is we are bound together. And that’s why, we need to have an, A core going forward, which we right now, which right now is a little bit in danger. And for political reasons, geopolitical reasons rather than anything else. And that is not healthy at all. This is really actually quite complicated.
Growth is slowing with distributional consequences 00:10:33:08
Goal growth is going down. And is, subdued right now. We are now at 2.5%, of global growth in a projection that is far below the 3%, which is basically the line where you have very few economies in recession. We’re going to go also to more fragmentation between the more developed and lesser developed economies, which of course is problematic.
Stable coins; unstable fin-tech? 00:11:00:21
And that is worrying me. Yeah. And at the same time you see different developments. Let me just talk about one very much discussed issue, and that is, you know, China is developing the digital yuan. Europe is working to introduce a digital euro. The US is, working on a dominance in US dollar denominated stablecoins. So we are going into very different directions.
Different paths; fragmentation 00:11:31:09
We’re going, going. We are fragmenting ourselves. Yeah. Not clear which system will really work. But, you talk about the global order. You know, we had times when we were walking, everybody was walking into the right direction, open economies doing the right thing. Now, also for political reasons. Very, very significant parts of the global economy are walking into different directions. And, you know, and I’m not so quite sure that this will really emerge. Again, it looks like we have more of fragmentation going forward. And that is, of course, also not good for global growth.
It’s going to make it harder to fix. And if we get to a situation where, especially here at the IMF, I must say that where you don’t think, how can I make sure that a crisis far away from here, can be fixed so that not the rest of the global economy is being affected? If that’s no longer the case. But if it’s all about a deal and all about, national algorithms, it’s going to be much harder, to find a mechanism to solve these crises together.
This inflation will have to be addressed 00:13:13:16
If, if you cannot, if, you cannot look through, the oil price shock and the potential food price shock would, which would take some time to develop. But, the Financial Times, as you may have seen, has been talking about this today also. And it’s very right, by the way, and it’s observation, if you cannot look through this inflationary tendencies will increase. And then the ECB and any other central bank will have to act and they’ll have to act decisively. And that is going to, even be more of a drain of an economic, growth scenario.
Mountains of AI coming…00:14:01:16
You know, AI, the optimistic part of AI is that that this is where the efficiency growth is, and this is very much playing into the hands of the United States. Other countries are not that advanced in terms of AI. The way I look at AI is a little bit more sober, though. That and all studies I have seen, they expect that we’re going to have $4,000 billion of investment in AI by 2030. If you are thinking about a and this is a volatile, risky investment, if you think about the return on invested capital of, let’s say, 15%, you need $600 billion per annum every year from 2030 onwards to pay out for these very, very highly, expensively funded AI investments. So that’s going to be tough. I don’t think that all those efficiency gains, which are substantial will pay off this amount of money.
Not all AI will work out but that is not critical for growth 00:15:03:15
So, and this is going to affect the entire economy. So, you know, a friend of mine just said this morning that if you, if you have that the dot-com bubble, remember, you know, what happened was it did the bubble did burst and some Ferrari dealers in Palo Alto had a problem, but it didn’t affect the entire economy. But if you have a 4000 billion funding in the United States, partially, attracting issues, this is affecting the entire economy because it’s so large. So it’s no longer a Ferrari dealer in Palo Alto. It is the entire economy. So we really have to see that this is has a lot of upside because of the efficiency gains. But it also has a downside, which not not is not factoring in that much. So I’m not able to end 100% on a positive note, there is positive there are very positive elements in it, but also there are risks. And we should take them also seriously because there are downside scenarios you.
Andreas has a cloud bank 00:16:21:16
Yeah, that’s a bank which no branches. So a bank which is basically an app. So you have it on your phone and you work with your app, you have your overdraft, you have your payment, you have your savings, you have your whatever on the app. It’s all in the cloud. So it’s, the modern way of banking. That’s what the young people like myself, but more my daughter are interested in. They’re not going into branches anymore. They’re not paying with cash anymore. They are basically, in the cloud. And so that in the UK you call these banks, I believe, telephone banks. So it’s a little bit like Revolut, a little bit like, the banks, you know, in this country. And that is a ten year old bank, which was actually one of the very first to innovate this. And that’s fun. So I work with young people. That’s really good.
ANDREAS DOMBRET
\Andreas Raymond Dombret (born January 16, 1960, in the United States)[1] is a German-American banker who served as member of the executive board of the Deutsche Bundesbank from 2010 until 2018. In that capacity, he held responsibility for Banking and Financial Supervision, Risk Controlling and the Bundesbank’s Representative Offices abroad.[2]
Earlier in his career, Dombret was the vice-chairman of Bank of America Global Investment Banking in Europe, the Middle East and Africa as well as head of the German, Austrian and Swiss branches. He holds dual German and American citizenship.
Early life and education
Dombret completed his MBA at Westfälische Wilhelms University Münster and earned his doctorate at Friedrich-Alexander University Erlangen-Nürnberg, where he wrote his dissertation on Takeover Premiums in M&A Transactions.[3] Dombret is honorary professor at the European Business School in Oestrich-Winkel[1] where he currently acts as visiting lecturer for the MBA graduate program in the courses Investment Banking and Capital Markets.
Career
Career in the private sector
Dombret began his career at the headquarters of Deutsche Bank. Prior to joining Bank of America, Dombret was a managing director and the co-head of Rothschild Germany. Prior to this, he spent 10 years with JP Morgan in London and in Frankfurt, and was a managing director in the Investment Banking Division covering German clients.
From 2005 to 2009, Dombret served as vice chairman of Bank of America Global Investment Banking in Europe, the Middle East and Africa as well as head of the German, Austrian and Swiss branches.[1]
Deutsche Bundesbank, 2010–2018
From 2010 until 2018, Dombret was a member of the executive board of the Deutsche Bundesbank, responsible for Banking Supervision, Risk Control, Economic Education, University of Applied Sciences and Technical Central Bank Cooperation and the Bundesbank’s representatives abroad.[2] In this capacity, he was also a member of the Basel Committee on Banking Supervision, the ECB Supervisory Board as well as the German Financial Stability Committee.
Later career
After retiring from the board of the German central bank, Dombret continued to serve on the board of Basel-based Bank for International Settlements until the end of 2018 and subsequently assumed a portfolio of advisory mandates. Among them are consultancy firm Oliver Wyman,[4] Sumitomo Mitsui Banking Corporation (SMBC)[5] and London-headquartered Equity Research firm Autonomous. In addition, he advises US Investment House Houlihan Lokey as Independent Chairman DACH and German Fintech Deposit Solutions, speaks at conferences worldwide and teaches as Adjunct Senior Research Scholar at the Faculty of International & Public Affairs of Columbia University in New York City.
