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“ECB Governing Council has gone too far.”

“ECB Governing Council has gone too far.” Interview with the BILD newspaper

14.09.2019 | Jens Weidmann DE FR

Interview with Jens Weidmann conducted by Kai Weise.
Translation: Deutsche Bundesbank

New bond purchases and even higher penalty interest rates for banks. Is that what's needed in your opinion, too?

Economic activity has cooled down, mainly in Germany but also elsewhere in the euro area. So inflation is expected to be somewhat lower. The ECB Governing Council has now adopted a very comprehensive package that will provide even more monetary policy accommodation. But I think it has gone too far with this decision. You see, the economic situation is not all that bad, wages are growing strongly, and the spectre of deflation – that is, of persistently contracting prices and wages – is nowhere to be seen.

What does this now mean for savers and property buyers?

Accommodative monetary policy greases the wheels of the economy. It helps create jobs and increase wages. This causes inflation to pick up more quickly. But that would not have called for a package as far-reaching as this one. For the general public, this means that if you are planning to build a house, you might get a cheaper mortgage, but if you are a saver, you will be worse off. Then again, you can benefit in a different way – your job might be safer, for example. Generally speaking, it will be more difficult to provide for old age without taking on more risk. Pension funds and life insurers in particular are feeling the effects of this.

Does this put paid to all our hopes of higher interest rates?

What’s clear from this decision is that low interest rates are going to be sticking around for quite some time to come. What matters to me is the prospect of scaling back the expansionary monetary policy when the outlook for inflation is amenable. But the ECB Governing Council has made a long-term commitment with its most recent decisions. All I can say is that I will do what I can to ensure that interest rate increases are not put off for any longer than necessary.

Has the ECB's monetary policy since the end of the financial crisis done Europe more harm than good?

The resolute monetary policy response to the financial crisis was appropriate – it prevented an even worse outcome. And given the slump in the euro area economy that followed, it was generally correct to have an expansionary monetary policy. What always mattered to me, though, was that monetary policy does not become harnessed to fiscal policy, because that jeopardises our ability to keep prices stable. The decision to buy even more government bonds has exacerbated this risk, and it is becoming increasingly difficult for the ECB to exit this policy. And what is also clear is that the longer monetary policy remains in highly expansionary mode, the greater the side effects and risks to financial stability will become.  

You're a longstanding critic of the ECB's monetary policy – but are your views falling on deaf ears at the ECB? Doesn't Draghi care what you say or do?

I’ve always singled out government bond purchases for criticism because there is a danger they might blur the boundary between monetary and fiscal policy. That is why we established clear constraints for these purchases on the Governing Council, not least because I pushed for them. So my concerns were taken on board. These new purchases, however, will call these constraints into question in the foreseeable future. And incidentally, I’m not alone with my critical stance. Mario Draghi, remember, indicated that opinion is divided on the Governing Council.

Are zero interest rates destroying our savings culture and eroding confidence in our economic system?

You're right to say that monetary policy is currently placing a strain on savers. But it's always a good idea to put some money away for later and to provide for old age, even if interest rates are low. And it's not as if people have stopped saving altogether. But I do agree with your point that when a public sector institution like the central bank chooses which instruments to use, it needs to make sure that its actions do not deeply unsettle people. That also means that people can count on their money retaining its value, that is to say, that the central bank will pursue its objective of price stability.

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