Jens Weidmann ©Frank Rumpenhorst

Jens Weidmann: “The monetary policy stance is appropriate at this time”

Bundesbank President Jens Weidmann sees no reason to move away from the last monetary policy assessment at the moment and cautions against pre-empting decisions that are not yet on the agenda. “The monetary policy stance is appropriate at this time,” he told interviewers from the German “Börsen-Zeitung” newspaper. After the second-quarter slump, he reported, the economy has grown faster than expected in recent months and confidence in the forecast’s baseline scenario has grown. “A certain resurgence in the infection rate would certainly be consistent with our forecast.” 

PEPP should not become a permanent fixture

Mr Weidmann also touched on expectations in the financial markets of a further scaling-up and extension of the pandemic emergency purchase programme (PEPP), which the European Central Bank (ECB) and the other Eurosystem central banks had adopted in March in response to the coronavirus pandemic. This programme has a target purchase volume of €1.350 trillion. “I would caution against pre-empting decisions that are not yet on the agenda and first need to be discussed,” Mr Weidmann remarked, whilst also stressing that the PEPP must not become a permanent fixture. “We adopted it as a non-standard crisis response measure. This was clearly communicated, and the Governing Council [of the ECB] should be reliable and consistent in this regard. [...] What I’m saying is that when the crisis is over, the PEPP should be terminated.” 

Turning to the Federal Constitutional Court’s ruling on the legality of the public sector purchase programme (PSPP) launched back in 2015, Mr Weidmann emphasised the importance of the specific features and safeguards of the PSPP, warning that “[i]f these boundaries were now blurred on a large scale, a legal problem might arise”. By his reckoning, the PEPP's flexibility has a great deal to do with its clearly limited purpose and restriction to the crisis period. 

Formulate inflation target in comprehensible and realistic language

Asked for his thoughts on the ECB’s monetary policy strategy review, Mr Weidmann said that discussions should centre around the definition of price stability and the wording of the Governing Council’s policy aim. “On this front, I am pushing for us to formulate our policy aim in comprehensible and realistic language. We should not give the impression that we are able to steer inflation precisely within a given quarter,” said Mr Weidmann. Moreover, he noted, the Governing Council needs to examine whether inflation is being measured correctly, adding that there are good reasons, for example, to add owner-occupied housing to the Harmonised Index of Consumer Prices. 

Weidmann unperturbed by euro appreciation

The Bundesbank President is relatively unperturbed by the recent appreciation of the euro and its impact on the economy. “I wouldn’t make too much of that. We shouldn’t look at euro movements in isolation from the factors driving them,” said Mr Weidmann, reasoning that the appreciation of the euro has been due, amongst other things, to a more expansionary US monetary policy, but also to improved economic developments in the euro area and the positive signal sent out by the EU measures to combat the crisis.

Mr Weidmann went on to explain that market participants should not conclude from central banks’ bold intervention in the spring that they will always come to the rescue. Central banks stepped in then, he noted, because the economic turmoil posed a threat to price stability. Looking ahead, though, Mr Weidmann can imagine that the rise in government debt will make the risk of fiscal dominance much more acute, which is problematic: “Pressure could mount on central banks going forward to keep interest rates and thus government funding costs low, even if this is no longer appropriate from a monetary policy perspective. That’s why we need to be very clear that we are not putting monetary policy into the service of fiscal policy.