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Frankfurt am Main | 18.01.2018

Weidmann: Set a clear end-date for asset purchases

Bundesbank President Jens Weidmann says the Eurosystem’s asset purchase programme should be discontinued this year. Pointing to the pick-up in inflation rates, he doubled down on his view that consumer price growth in the euro area is on a path towards the target inflation rate of below, but close to, 2%. The Eurosystem’s staff projections point in a similar direction, he noted. "But if activity remains as upbeat as it is at present, it would be logical not to make any more substantial net purchases beyond the currently agreed timeframe," he argued in an interview with the German newspaper Frankfurter Allgemeine Zeitung. 

The ECB Governing Council decided in October 2017 to halve the monthly asset purchases as of January 2018 from €60 billion to €30 billion and also to extend the purchases until at least September 2018. Mr Weidmann made a case for setting a clear end-date for the purchases, but acknowledged that most Governing Council members remain slightly more cautious on this score, which is why the Council still has not decided when to cease the asset purchases. He reiterated his view that government bond purchases should generally only be used as a last resort, such as to fend off the risk of deflation, on account of inherent adverse side-effects which should not go unnoticed. These include making central banks the euro area countries’ biggest creditors, which is increasingly blurring the boundaries between monetary and fiscal policy and could make it difficult to exit the non-standard measures, he argued. 

Brisker wage growth will possibly boost inflation 

Turning to the debate surrounding a possible policy rate hike, Mr Weidmann drew attention to the ECB Governing Council’s current forward guidance. Expectations in analyst circles that the ECB will raise its policy rate in mid-2019 at the earliest are more or less in line with that forward guidance, he noted, "which says that key interest rates will only be raised well after the end of the net purchases". 

Mr Weidmann also used the interview to comment on wage developments in the German labour market. The Bundesbank does not articulate any recommendations or wishes about how strongly wages should rise, he explained, but it does need to make wage growth assumptions for its macroeconomic projections and it does state what rate of wage growth is consistent with price stability.While current wage developments in Germany are weaker than the economic situation alone would lead one to expect, Mr Weidmann said it is worth remembering the role played in Germany by migration flows from other EU countries, which have boosted the supply of labour and dampened wage inflation. Another factor is the increased importance which the trade unions engaged in wage negotiations attach to non-wage components, such as working-time arrangements and old-age provision. The Bundesbank is expecting to see wages rise more briskly next year, at a rate of just over 3%, on the back of persistently strong German economic activity. This, Mr Weidmann argued, will probably play a crucial role in boosting inflation growth. 

Weidmann does not consider Bitcoin a regular means of payment

Discussing European politics, Mr Weidmann recalled his criticisms of the European Commission’s latest reform proposals. "The upshot is that the fiscal rules won’t be strengthened, while at the same time more and more elements of joint liability are supposed to be introduced in the euro area," the Bundesbank President remarked. "This won’t make monetary union more future-proof, because action and liability will fall even further out of step." Mr Weidmann noted that of course some tasks have to be addressed at the European level, such as jointly securing the external borders and transnational energy and communication networks. "But I would begin by defining those tasks, not by making a wholesale call for more money for Europe," he said. Asked about the proposal to create a "stabilisation facility" in the form of a fund to grant assistance loans to countries in crisis with no conditions attached, the Bundesbank President’s response was restrained. The existing rules and arrangements of monetary union are sufficient, because "a member state with sound public finances can take effective measures against downturns or crises using fiscal mechanisms, without breaching the fiscal rules or having to resort to outside assistance," Mr Weidmann argued. In order to make a definitive assessment, he continued, it will, however, be necessary to know the exact set-up of a facility of this kind. 

On the topic of cryptocurrencies, Mr Weidmann said that he does not consider Bitcoin, for example, to be a regular means of payment. Transactions take quite a while; moreover, Bitcoin has no stable value, which a means of payment must have, he commented. But the Bundesbank President was cautious on the issue of calls for tighter regulation of cryptocurrencies because of the strong fluctuation in their value. After all, there are many ways to make high-risk investments and possibly lose the money, he pointed out. He believes it is more important to address the role of cryptocurrencies in criminality, such as extortion, money laundering and terrorist financing. For central bankers, he said, there is also the question of when cryptocurrencies might begin to jeopardise financial stability, such as when banks provide more loans or liquidity. "But precisely because of the hype surrounding cryptocurrencies, I believe it is all the more important for regulators to keep a cool head and carefully examine the need for any interventions," he concluded.

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