“We can dose purchases carefully” Interview published in “Handelsblatt”
Interview with Jens Weidman conducted by Kathrin Jones, Jan Mallien and Frank Wiebe.
Translation: Deutsche Bundesbank
Mr Weidmann, life is slowly but surely returning to normal, the economy is reawakening from the lockdown. How do you see things?
Just like anyone else, I enjoy meeting up with other people, attending to my everyday affairs or doing something nice during my free time without too many constraints. The economy is set to bounce back fairly quickly now. The pandemic still isn’t over – just take the emergence of new variants of the virus – but all in all, the outlook is better now and no longer quite as uncertain.
When will the European Central Bank (ECB) exit crisis mode and return to normal, tighter monetary policy?
In spite of the upbeat economic news for the euro area, inflation according to our forecasts will still be noticeably below 2% in 2022 and 2023. That’s why a loose monetary policy stance remains appropriate at the present time. I do, however, also see scope for somewhat stronger price dynamics, and as further progress is made towards overcoming the pandemic, the non-standard measures introduced to counter the crisis will hopefully soon be unwound.
And yet a majority of ECB Governing Council members last week voted in favour of leaving asset purchases under the pandemic emergency purchase programme (PEPP), which has a total envelope of €1.85 trillion, unchecked. Did you count among the majority in that vote?
The monetary policy stance depends not so much on the monthly ups and downs of purchases as on the total volume. You will have heard at the subsequent press conference that there were also some members who wanted to slow the pace in the summer. I’m certainly optimistic that we will make progress in overcoming the crisis and can then dose the purchases more carefully.
As you know, the PEPP is scheduled to run until at least the end of next March. When will the ECB have to signal to the markets that this date might end up being overrun after all?
Given the uncertainty that still persists in both directions, it seems to me that making longer-term commitments at this point in time would appear to be neither helpful nor credible. In my view, furthermore, it is less crucial when exactly we communicate and more that we communicate clearly and convincingly when we do so. Once the emergency situation the PEPP was created to address is over, the PEPP itself needs to be terminated.
The PEPP gives the ECB a special degree of flexibility, including scope to deviate asset purchases away from the capital key – that is, the weighting of Member States according to their share of total population and GDP in the EU. Would it be conceivable to apply this flexibility to the APP programme, with its net purchases at a monthly pace of €20 billion?
The PEPP is a programme for an exceptional situation that calls for and justifies the particular degree of flexibility. When that exceptional situation has passed, it will no longer be appropriate to have such a high degree of flexibility.
And when will the emergency situation be over?
The preconditions for me would be the expiry of the key measures introduced to contain the pandemic and an entrenched economic recovery. Needless to say, we shouldn’t withdraw the support too soon. However, I currently assume that we will no longer have such a large output gap next year – not even if we scale back the emergency monetary policy measures. That would then no longer be a crisis year, in my eyes. This is ultimately a matter for the ECB Governing Council to decide.
Could one criterion be that the ECB’s inflation forecasts return to more or less pre-pandemic levels?
I don’t buy that. It’s an exceptional emergency programme we’re talking about here, and the emergency will probably be well over by then.
Would it be possible to increase the APP somewhat to cushion a PEPP tapering?
Those two programmes have different aims, and I wouldn’t intermingle them in that way. What counts is that the emergency PEPP instrument is terminated when this emergency is over. The APP is geared to the general monetary policy stance and should be considered as a separate item.
Let’s turn our attention to inflation. The Bundesbank forecasts that inflation could reach 4% in Germany and more than 2% in the euro area this year. How great is the danger that this trend might become entrenched?
The price outlook is particularly uncertain after a crisis of this kind, of course. But it is quite clearly the Eurosystem’s mandate to prevent permanently high rates of inflation. In our view, the strong price increase in Germany is temporary in nature, and there are no indications that rates will be too high in the medium run. A number of conditions need to be met for inflation to become stubbornly too high, one being excessive wage agreements. We have no reason to believe that is the case at present.
But that does nothing to change the fact that Germany in particular worries a great deal about persistently high rates of inflation.
For consumers, of course, an inflation rate that temporarily reaches 4% – which is what we are forecasting at year-end for Germany – means that their purchasing power will shrink to the same degree. But that’s compared with the previous year. And one factor that needs to be borne in mind here is that purchasing power was higher in 2020 due to the temporary cut in VAT rates. Note, too, that the official price statistics are based on a representative basket of goods that won’t necessarily reflect everyone’s real-life situation.
How can that situation be improved?
By including the costs of living in one’s own four walls in the Harmonised Index of Consumer Prices, for example. This is something I’ve called for in the past, and it now ranks as a major item in our strategy review.
Many people have saved a pile of money during lockdown. If these people catch up on consumption, won’t that drive prices higher?
That’s a factor we tried to incorporate into our forecast. If increased demand runs up against limited supply, enterprises might raise their prices. But individual firms’ behaviour will differ from one area of activity to the next. Moreover, catch-up effects in consumption would taper off again. There are also areas where demand picked up during the pandemic and could recede again, such as furniture or household appliances. And there are differences across the euro area. We have learned from our surveys that in Germany, many households would like to spend some of the additional savings they have accumulated. The situation is different in Italy, say, where the public appears to be showing greater restraint.
The coronavirus crisis is not like the financial crisis. Back then, inflation was subdued for a very long time afterwards. Now, economists are expecting a strong economic rebound following the abrupt slump in 2020. Is there a danger that the central banks are dwelling on the financial crisis and are therefore being too slow to tighten monetary policy?
It is safe to say that the pandemic is a challenging time for all policy areas. I think it is important for central banks to look in both directions: not just at deflation risk but at the risk of inflation actually increasing. I also see monetary policymakers running the risk of coming under political pressure to keep interest rates low for longer than necessary due to excessive sovereign debt.
The inflation aim also has a role to play in the strategy debate. Can we expect the wording of “
below, but close to, 2%” to be streamlined here?
The views gathered from various stakeholder groups as part of the strategy review have once again highlighted the need to word our aim in a way that is more understandable. This is something that I have said before. And this is also something that the ECB Governing Council will no doubt address.
So “2%” as a symmetrical aim?
That would certainly make sense to me.
Another cause for concern for wide sections of the general public is the high, debt-financed government spending in response to the pandemic. Is there also a risk of inflation stemming from this?
First of all, it was completely right for governments to take determined action in response to the coronavirus crisis. I do not see any danger of overheating once measures come to an end after the pandemic, either.
But it will also result in Europe emerging from the crisis saddled with significant debt.
The problem is that certain countries were highly indebted even beforehand. Once the crisis is over, it is precisely those very high debt ratios that need to be brought back down reliably. Transparent and binding fiscal rules will help here. That will also protect monetary policy. It should not keep interest rates low simply to keep borrowing cheap for governments. Monetary policy cannot be allowed to play second fiddle to fiscal policy. If it is needed to safeguard price stability, we will have to raise interest rates.
The ECB wants to launch the digital euro soon. The decision comes at a time when the hype surrounding cryptocurrencies is at fever pitch. What are your hopes with respect to the e-euro?
That consumers and businesses will be able to pay in central bank money in a digital setting. For me, it is crucial that the digital euro add real value, for instance by giving rise to new services.
A digital euro could become cash of sorts. Is there not then a risk of people withdrawing their funds from the bank during a crisis and exchanging them for digital euro, resulting in a bank run?
Yes, the digital euro also has its risks. And we need to design it in such a way as to keep these contained. Options on the table include holding limits and tiered remuneration. At the same time, however, constraints of this kind would diminish the digital euro’s appeal. And there are a lot of unanswered questions, for instance whether the same barriers should be in place for individuals and enterprises. Incidentally, businesses and consumers differ in terms of what they want the digital euro to look like. For example, many businesses would like a means of payment that can be integrated into fully automated processes.
As in programmable money?
Yes. With the help of blockchain technology, payments could be automatically triggered when certain conditions are met – let’s say, when a good arrives at its destination. This would not necessarily require digital money to be issued by the central bank; it would also work with an appropriately designed form of commercial bank money. The Bundesbank is working on a wide variety of solutions to make payments more efficient.
In terms of its plans for the digital euro, is Europe not late to the game compared to countries such as, say, China?
Given the risks involved, plans of this nature warrant a great deal of consideration and preparation. We require a solution that is tailored to the needs of Europe. And China is not rushing the introduction, either, but rather proceeding gradually and with caution.
The advent of bitcoin and other cryptocurrencies does present a challenge, though. Why should the younger generation wait for the e-euro when they have bitcoin?
I am not at all impressed by bitcoins as a means of payment. Just ask your friends or acquaintances if they pay for their purchases using bitcoin! The transactions take a long time to complete and use a lot of electricity. The attention it attracts is focused first and foremost on its wild price swings. This is precisely the reason why this crypto token is not suitable as a store of value. What that leaves us with is speculation.
Have you already been brave or curious enough to invest in bitcoins?
I am curious about the opportunities presented by the underlying blockchain technology, which is constantly evolving. My experts also give me regular updates on these developments. There is therefore no need on my part to buy bitcoins. Furthermore, financial investment should not be done on a dare.
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