“I see no reason to panic” Interview in der Frankfurter Allgemeinen Sonntagszeitung
Interview with Jens Weidmann in the Frankfurter Allgemeine Sonntagszeitung.
Mr Weidmann, clouds are gathering over the economic outlook. Are Europe’s monetary policymakers getting ready to launch another large-scale operation?
It’s become something of a habit for people to turn straight to monetary policymakers and demand a large-scale response. Ever since the onset of the crisis, central banks have been widely regarded as the only institutions capable of taking action. I think that’s wrong. And what’s more, it doesn’t do justice to the euro area’s latest economic data, either.
But surely the economic situation doesn’t leave you cold?
Of course it doesn’t. There’s no reason to panic, though. Sure, the economic situation has dimmed, especially in Germany. We’re experiencing a downturn in activity. But the German economy is coming out of an extended upswing with record-breaking employment and high capacity utilisation levels. The outlook is particularly uncertain right now. But that’s primarily down to political factors like Brexit or the global trade conflicts.
So you’re saying the downturn is still uncertain?
Forecast uncertainty is very high. And of course there are major items on the economic policy agenda that need to be addressed. But it would be wrong for us to act for action’s sake or to succumb to pessimism.
Yes, but what exactly can the ECB do if the economic data continue to deteriorate?
See, you’re turning straight to the ECB yet again. First of all, the automatic fiscal stabilisers would take effect – that is to say, the tax system and unemployment insurance fund would automatically support the economy if activity slowed down. Furthermore, Germany especially, and others, too, would have fiscal leeway to actively mitigate an aggravated downswing. If the economy tanks, the budgetary rules provide scope for yet further fiscal action.
Are you on the same page as ECB President Mario Draghi and other monetary policymakers when they say that this is now a matter for fiscal policy?
There’s no doubt that fiscal policy has the task of stabilising the economy, as long as this doesn’t put the sustainability of public finances at risk. In a low rate setting, it can be even more effective, if anything. For this reason, if a real recession materialised, the ball would indeed be in the fiscal policymakers’ court in my view – and that goes for Germany, too. But as I mentioned earlier on, the current outlook is uncertain. That’s still no reason to roll out a large-scale programme to stimulate economic activity. Nor should we forget that Germany’s fiscal policy stance is already expansionary and that more expansionary steps are in the pipeline.
And what about monetary policy?
Monetary policy is committed to safeguarding price stability in the euro area. If price stability comes under threat, it needs to respond, and weaker economic activity depresses price pressures, of course.
If you now look at inflation and at the ECB's mandate, safeguarding price stability, would you say this warrants any action by the central bank?
We agree on the ECB Governing Council that monetary policy needs to be expansionary at present. However, our June forecast indicates that inflation will rise gradually and return to a level in 2021 that is not far from the target of “below 2%”. The current debate centres around the question of how strongly the ECB needs to respond if price pressures diminish, and what the impact and side effects of individual measures will be.
What exactly is so bad about having an inflation rate that hovers for a time between 1% and 1.5% rather than close to 2%?
At first glance, there’s nothing wrong with that. I dare say most people probably wouldn’t see that as a problem. And the ECB Governing Council has broadly defined price stability as euro area inflation that is below, but close to, 2%. So in principle, any inflation rate between zero and 2% would be consistent with price stability. But the crux is that the Governing Council made it clear in 2003 that as part of this definition it is pursuing a price stability objective: inflation rates that are below, but close to, 2% over the medium term. At present, this means that we have to achieve a reliable convergence to get back up to this target. It’s important that monetary policy is credible in the pursuit of its objectives. If it is not, there’s a risk that inflation expectations and real interest rates might align, and that could become a problem for monetary policymakers.
Would it be a good idea to change the central bank’s inflation target?
Needless to say, we have to review the monetary policy strategy from time to time. And the target rate of inflation is a crucial aspect of this strategy. I hear many people in Germany saying that a little less inflation wouldn’t go amiss. And then there are the voices calling for a higher rate of inflation. That would also push up nominal interest rates, they claim, giving monetary policymakers greater scope to take action. It’s all rather complex. But I see no compelling evidence which would warrant calling the existing target itself into question. So my view is that we should stick to our target, which has consciously been set as a medium-term objective.
But doesn’t there come a point where it’s frustrating for an institution like the ECB to have a target that it’s unable to reach?
What matters is that we’re on track to hit that target. If our journey experiences the occasional delay for good reasons, I think that’s acceptable.
And if the ECB now intends to provide continued monetary policy accommodation, what case can be made for a further cut in policy rates and what can be said for new asset purchases?
If interest rates stay low and if the stocks of purchased assets are kept steady, monetary policy is still in highly expansionary mode. The question is, are new measures necessary for monetary policy reasons, given our price outlook, especially if the side effects become more significant and the instruments less effective? You know I call for particular caution where government bond purchases are concerned because they risk blurring the lines between monetary and fiscal policy. That’s also the reason why the Governing Council installed a couple of constraints. One prevents us from buying a disproportionate volume of assets from highly indebted countries. Another largely rules out a mutualisation of liability. Yet another only allows us to purchase one-third of a country’s issues. There is still a degree of leeway within these confines. But I think it would be wrong to question the criteria as such. More than anything, we need to steer clear of the territory bordering on monetary financing.
But at the ECB Forum on Central Banking in Sintra, Portugal, Mr Draghi made it quite clear that he wasn’t interested in these government financing arguments.
That wasn’t how I interpreted his words. Asset purchasing limits were of great importance to the ECB Governing Council when Mr Draghi adopted the programme, also in terms of ensuring a safety margin to monetary financing of governments.
What do you fear the side effects of significantly extended asset purchases will be?
As I said, I worry that the dividing line between monetary and fiscal policy will become increasingly blurred. This will make it more and more difficult to free monetary policy from the clutches of fiscal policy, which will, in turn, make central banks ever more politicised, jeopardising their independence. Only independent central banks can reliably safeguard price stability.
Can the central bank continue to drive interest rates into negative territory indefinitely, or is there a lower limit?
Over the last few years, negative interest rates have proven possible as well as effective on a monetary policy level. But the lower the interest rates, the stronger the incentive to hold currency. At some point, then, further interest rate reductions will become ineffectual. However, I don’t believe we’ve reached that point yet.
Insurance corporations claim they would store cash in their vaults so that they don’t have to pay negative interest rates on deposits at the ECB – do you think that’s true?
This illustrates the point that there is a lower bound on interest rates. We have a good overview of changing practices in holding cash. At credit institutions, at any rate, we have identified a slightly higher volume of cash holdings.
How much independence does a central bank still have in this day and age? In an inverted yield curve, where interest rates are lower on longer-term bonds than short-term bonds, market expectations are shaped by interest rate reductions. Does a central bank have any other option than to fulfil market expectations?
If we only acted in line with market expectations, the ECB Governing Council wouldn’t have to get up in the morning. Besides, the yield curve is a reflection of various different factors. Expectations of further interest rate reductions are just one element, and there is no onus on us to fulfil these expectations. Even if the markets falter, this mustn’t stop us from doing the right thing.
The German banks would like to see a tiered interest rate on deposits at the ECB, similar to the system used in Switzerland. Should they get their hopes up?
The low interest rate environment puts pressure on banks, and a tiered deposit rate system would provide relief. From that perspective, I can understand such demands. For us, however, the deciding factor has to be whether tiering will increase the effectiveness of monetary policy. The issue is still under discussion in the ECB Governing Council; no decision has been made yet.
You say that monetary policy does not have to fulfil the expectations of banks or even those of countries. Does it have to fulfil savers’ expectations, then?
We must fulfil everyone’s expectations by ensuring price stability. That is our mandate.
So when savers in Germany urge the Bundesbank’s president to do all he can so that their savings accrue interest again, are you completely indifferent to this?
Of course I’m not. I do understand their concerns. From the savers’ perspective, the fact that we’re discussing easing policy further during a long period of low interest rates is compounding the problem. There’s normally a certain degree of offset over the course of the business cycle, which is something we’re not seeing at present. In light of the current euro area inflation outlook, though, an expansionary monetary policy stance is appropriate. Besides, nobody is just a saver – the general public are employees, borrowers and taxpayers as well. The pay-as-you-go statutory pension insurance scheme, for example, is profiting from high employment with marked wage increases. The low interest rates are having a positive impact here. Moreover, monetary policy is just one factor contributing to low interest rates; the long-term trend of declining growth also plays a role.
What do you expect to see from the new ECB President Christine Lagarde? Will she do things much differently to how you would have done them?
Christine Lagarde will perform her duties her way – the decision to appoint her wouldn’t have been so important otherwise. I have known and respected Christine Lagarde, not just since she became Managing Director of the IMF, but since her time as a government minister under President Sarkozy. I’m sure that we’ll work together well, and I look forward to doing so. Significant challenges await Ms Lagarde, including slowing economic activity with a depressed inflation outlook and a monetary policy which has already done a great deal. She will have to demonstrate determination, but mustn’t lose sight of the side effects resulting from the measures we implement. Not only that: she will have to stand firm against policymakers wishing to instrumentalise monetary policy. That’s a tall order.
Is it then appropriate for Mario Draghi, who is soon to step down from the role of ECB President, to leave his successor Christine Lagarde so little monetary policy leeway with such a large-scale easing programme?
Monetary policymakers must act where they see fit. But in my view, any potential adjustments made to the monetary policy strategy should be decided under the new president.
Does the European Central Bank need a new monetary policy strategy? Lately it has almost seemed as if a symmetrical inflation aim existed, meaning that it would be equally undesirable for inflation to be significantly above or below 2%. To date, however, the official aim has been asymmetrical: “below, but close to, 2%”.
Yes, I agree that the formulation of objectives in the past has not been symmetrical viewed in conjunction with our definition of price stability. That is something that could be discussed in a comprehensive strategy debate. In the current scenario, this new interpretation of the target would, above all, further increase pressure to take monetary policy action.
When the ECB set its inflation target, no one would probably have ever guessed that the central bank would have to devote so much time and energy to tackling unwelcome low inflation.
That really was something that we could not have foreseen. As European monetary policy was taking shape, the challenge was, if anything, to avoid excessively high inflation rates. Time and again, we are confronted with a changing environment. But rather than making changes to our strategy in haste, they should only be made following sufficient discussion in the ECB Governing Council.
If you take a glance back at recent years, were some of the concerns surrounding non-standard monetary policy overblown? For example, the fear that ultra-accommodative monetary policy could, at some point, open the door to inflation?
Fears of imminent hyperinflation were certainly overblown. But that was not and is not the reason why I advise caution with respect to non-standard monetary policy. On the one hand, my concern is that monetary policy could be misused by fiscal policymakers. Somewhere down the line, politicising monetary policy also damages a central bank’s credibility, and thus its ability to safeguard price stability. We are already witnessing an increasingly politicised debate on monetary policy in a number of countries. Second, we need to keep an eye on the medium to long-term risks to financial stability. It is not for nothing that most euro area countries have already taken macroprudential measures in this regard. If these risks were to materialise, it could likewise adversely affect our ability to safeguard price stability.
The Bundesbank, amongst others, has long warned of exaggerations in the real estate market. Why has the bubble not yet burst?
As a general rule, you often don’t know there was a bubble until after the fact. We are observing price increases in many areas of the German real estate market that can no longer be readily explained solely by factors such as income and population. But what matters to us is whether this could give rise to risks to financial stability. We still view these increases as fairly moderate given that lending does not appear to be exceptionally dynamic or risky.
Taking a look across the Atlantic, the US Fed deviated from its strategy, at least in the short term, at the turn of the year. What will this mean for European monetary policy?
The Fed did not change its strategy. It responded to elevated risks to the economic outlook and cut interest rates. This will have indirect consequences for European monetary policy, as it will have an impact on our macroeconomic environment through channels such as exports and the exchange rate. But the reverse also holds true, of course: if the ECB further loosens the monetary policy reins, this could, in turn, step up pressure on the Fed to act.
Do you fear that trade wars, to make use of the martial term, could also take the form of currency wars in the future?
Some politicians do indeed appear to view the exchange rate as leverage in trade policy. It would aggravate what is already a troubling development. The economic slowdown that we’ve been discussing all this time is closely linked to trade conflicts. As an open economy, Germany in particular has a huge amount to lose here.
Which poses the greater threat to central banks’ independence: Donald Trump or Libra, Facebook’s new digital currency?
I do not view Libra as a threat to central banks’ independence. For me as a central banker, the real issue with respect to Libra is this: what impact would a private digital currency of this kind have on monetary policy, financial stability and the payments system if it were in widespread use? But, as things currently stand, we have no idea whether it will come to that and what specific form Libra will take. In any case, Libra could help speed up and reduce the cost of cross-border payments, in particular.
Will Libra make central banks redundant before long?
I am not worried, at least as far as the euro area is concerned. The euro is a solid currency that can be used in a multitude of ways to make convenient, secure and fast payments. Libra is what is known as a “stable coin”, which “borrows” the stability of established currencies. This would make Libra more stable in value than Bitcoin, say, and could appeal to users in some emerging market economies, for example. While its precise form is still unclear, Libra would probably entail exchange rate risk and credit risks for users in the euro area. If, for instance, the US dollar exchange rate were to fluctuate, the value of Libra’s basket of currencies against the euro would also change.
So Libra is a non-issue for central banks?
To my mind, the debate surrounding Libra highlights two points. First, we as central banks need to continue working to improve those systems that are pivotal to the handling of payment transactions. The banks need to play their part and continue offering the public low-cost, fast and convenient euro payment options. Competition is definitely good for business in this regard. Second, we have to make sure that Libra does not cause regulation to be undermined, especially regulation relating to consumer protection, the prevention of money laundering and the security of payments.
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