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Frankfurt am Main | 13.12.2016

Prompt tightening of the monetary policy reins

Bundesbank President Jens Weidmann has spoken out in favour of putting a timely end to the expansionary monetary policy of the European Central Bank (ECB). In an interview with the Frankfurter Allgemeine Sonntagszeitung (FAS), he took a critical view of the ECB Governing Council's decision to extend the asset purchase programme until at least the end of 2017, describing it as "highly substantial".

In addition to extending the programme, the ECB Governing Council also agreed last Thursday to reduce the monthly purchase volume from currently €80 billion to €60 billion, starting in April 2017. With this decision, the ECB Governing Council is signalling its increased confidence in the euro area's economic recovery, Mr Weidmann explained, and that deflationary developments are therefore no longer a cause for concern. In this context, the Bundesbank President made reference to the ECB's most recent forecast, according to which inflation in the euro area as a whole is expected to rise to 1.7% by 2019 and is therefore moving closer towards the ECB's stability objective of just under 2%.

Ultra-expansionary monetary policy should not go on forever

In principle, given the subdued price outlook to date, Mr Weidmann feels that the current accommodative monetary policy is appropriate, and added that the ECB Governing Council members are in agreement on this. What is mainly debated is the degree of monetary policy accommodation and the individual instruments: "It is important to make clear that such an ultra-expansionary monetary policy should not last forever," he remarked. He therefore urged that the monetary policy reins be tightened as soon as price pressures have substantially increased again. "Governments and financial markets will have to adapt and central banks must not be deterred by the resistance that is then to be expected," Mr Weidmann said. He also re-emphasised the fact that monetary policy decisions have unintended side-effects, too, which grow with the duration of the ultra-accommodative monetary policy.

Market discipline has been weakened

With regard to the high debt levels in many euro-area countries, the Bundesbank President said that it is not enough to establish rules and believe that everyone would abide by them. "Market discipline is also important against this backdrop so that higher interest rates are ultimately imposed on countries with unsound fiscal policies," he stated, pointing out that the ECB's accommodative monetary policy has weakened market discipline. At the same time, Mr Weidmann reminded monetary policymakers not to allow themselves to be pressured into becoming responsible for public finance sustainability.

Brexit's impact is hard to predict

Regarding the United Kingdom's pending exit from the European Union (EU), Mr Weidmann explained that reliably predicting what form Brexit will take and what consequences it will have is impossible at the moment. While he hoped that the EU would continue to maintain close ties with the United Kingdom, he added that the EU's four basic freedoms, in his opinion, cannot be separated. "The desire to remain part of the single market is not compatible with wanting to place restrictions on the free movement of people," Mr Weidmann said.

In view of the protectionist signals being sent by US President-elect Donald Trump, Mr Weidmann warned of possible strains on the global economy. "Everyone would ultimately be worse off in a world of more protectionism," the Bundesbank President commented, but he felt that Germany would be hit particularly hard, considering the country is so well integrated into the global market.

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