Introduction, DNB Annual Report 2022 press conference

This has turned into an unlucky time of year. Three years ago, we held this press conference remotely for the first time in history because of the outbreak of the coronavirus pandemic. A year ago, Russia violated the international rule of law by invading Ukraine. And now financial markets are reeling again due to problems at banks in the US and Switzerland. Problems that, incidentally, are largely isolated.

So uncertainty is still high. The best thing you can do as a central bank in the face of uncertainty is to stay the course. And that is the title of our annual report that you have received under embargo. 

Despite the shocks of recent years, which have mainly caused a great deal of human suffering, the Dutch economy and the Dutch financial sector are in good shape. Our economy grew by 4.5% in 2022, following on from healthy growth of 4.9% in 2021. Economic growth was even above the long-term average. This was also reflected in unemployment, which was low in 2022 at 3.5%. The labour market is tighter than ever, and the solvency of banks, insurers and pension funds remains at stable and resilient levels.

We are more than dissatisfied with the current high levels of inflation, however. The pandemic and the war caused energy and food prices to rise on the one hand, while the booming economy, buoyed by government support policies, boosted inflation on the other.  As a result, inflation in the Netherlands was 11.6% last year. And when you’re having a hard time affording your groceries, it really doesn’t matter how optimistic the macroeconomic picture is: times are tough for many.

The European Central Bank responded by ceasing new bond purchases and gradually raising interest rates by 3.5 percentage points. The ECB will continue to do everything it can to bring inflation back down to the 2% target. Fortunately, energy markets are calming down and inflation has started to fall. Underlying inflation, prices excluding energy and food, is remaining elevated for too long. So the ECB still has a lot of work to do.

The Dutch government responded to the sharp rise in energy prices with a substantial support package, as it also did during the pandemic. This is certainly understandable, but expansionary fiscal policy also boosts inflation. Future support measures should therefore be targeted at those most affected – and stay within fiscal rules.

In addition, not only the central bank, but also the government must do what it can to stay the course. For example, support policies must not take away incentives to strive for greater sustainability. Indeed, people worry about global warming even in times of pandemic and war. If we do nothing, we will put our children’s and grandchildren’s prosperity and well-being at great risk, along with our own.

In short, while our economy has proved more robust and resilient than many thought, much remains to be done. Indeed, the storm has not yet abated and there are still relatively many uncertainties. I would like to mention three.

First, rapidly rising interest rates are a threat to financial stability, as we have seen in recent weeks. In general, higher interest rates are actually beneficial for financial institutions. However, the path along which interest rates rise can be a bumpy one. As interest rates rise, financial assets lose some of their market value. Financial institutions need to readjust to a world of positive interest rates and wean themselves off a situation where money was free for a long time and they were emboldened to take risks to get at least some return. Developments in the US and Switzerland are a reminder that poor risk management can get financial institutions into trouble and undermine trust in the financial sector. Meanwhile, banks are many times more resilient today than they were during the financial crisis. They hold more and better capital, and there is more than enough liquidity.

Second, the Russian war in Ukraine does not seem likely to end any time soon. And geopolitical thunderclouds are also gathering elsewhere in the world – consider the tensions between the US and China. Geopolitical risks give rise to international economic fragmentation, which has a major, negative impact on a small, open economy like ours. To confront this challenge, we will have to embrace our place in Europe more than ever before, not only because of the war and our security, but also to safeguard our economic prosperity. We owe a great deal of the prosperity we have built up since the Second World War to European integration.

A third concern stems from the high levels of debt accumulated by governments and businesses around the world both during and in the aftermath of the pandemic. In a low-interest-rate environment, these debts are manageable. But when interest charges rise, which is now the case, governments and companies can get into trouble. This in turn could adversely affect the economy or financial institutions. After all, it is they who are financing those companies and governments.

How do we now see the future?

First, as I have mentioned, we need to stay the course. The ECB needs to do more to tackle inflation. The government should set a clear course for making our economy more sustainable. And sustainability can only be achieved if the structurally tight labour market is also addressed. After all, we need people to insulate houses and install solar panels.

Second, buffers are essential to be prepared for future shocks. Our ship needs to be made more storm-proof. With public debt at around 50% of GDP, the government seems to have sufficient buffers. The deficit will rise to the threshold value of 3% of GDP this year, however. The structural deficit is even larger if we adjust for the boom times we are currently experiencing. This gives rise to the risk that the government will have to hit the brakes hard in the event of a new shock or even in the face of disappointing economic growth. And it is precisely at times like these that fiscal policy must provide room to cushion the impact. While public debt may be relatively low, our deficit should also be lower in these boom times.

The financial sector must also remain resilient with adequate financial buffers. The fact that the sector is able to absorb shocks now is no guarantee for the future. The past few weeks have been a reminder that enforcing buffer requirements is beneficial for both large and small banks. The lessons learned in the aftermath of the global financial crisis are still just as relevant today. European policymakers must fully and comprehensively implement the global tightening of the banking capital framework (Basel IV) in the European Union. Especially now. And from my perspective as chair of the Financial Stability Board, it is positive that we are also strengthening the global supervisory framework for non-banks. These institutions must also be resilient to shocks.

Third, because the Netherlands rides the waves of the global economy, it helps us when the rest of Europe and the rest of the world are also doing well. The Netherlands can contribute to this by playing an active and constructive role in the European Union and at the IMF and G20.

On top of all this, it is important that no one in the Netherlands is left out. So whatever policy we pursue should be a policy for everyone in the Netherlands, together with everyone in the Netherlands.