Maintaining awareness of the importance of price stability

Symposium price stability and financial stability ©Alexandra Lechner
Speaking in Frankfurt, Bundesbank President Jens Weidmann underscored the importance of price stability in times of low inflation. Given the very low inflation rates, he thinks there is a danger that the general public might lose their sense of the importance of stable prices. "That would be bad news for central banks," he warned at a joint symposium of the Bundesbank and the Monetary Stability Foundation in Frankfurt.

"If inflation starts rising again and the monetary reins ought, by rights, to be tightened, the sight of mountains of government debt might tempt some to push for rate hikes to be put on ice," said Weidmann. A stability-oriented monetary policy would then "need the full backing of the public at large". Approximately 100 economists and legal professionals were in attendance at the symposium to discuss the interrelationship between price stability and financial stability. Former Bundesbank Presidents Hans Tietmeyer and Ernst Welteke were among the high-level participants.

Prerequisite for economic prosperity

"History tells of the recurring hard-won battles to achieve and uphold price stability," recalled Weidmann. Unlike higher wages or lower taxes, the advantages of price stability for individuals are harder to quantify, but they benefit the entire population, he said. That's why, according to Weidmann, central banks are constantly at risk of being pressured to subjugate the goal of price stability to other economic policy objectives.

It's not just excessively high inflation that is damaging, but also excessively low inflation, he noted. Judging by the official definition of price stability, inflation at the moment is, if anything, "skewed to the low side", he added. The ECB Governing Council has defined price stability as a year-on-year increase in consumer prices of below, but close to, 2% in the medium term.

"Our definition of price stability as a medium-term target lets us wait and see how the non standard measures unfold," explained Weidmann. While admitting that monetary policy runs the risk of losing credibility if the inflation rate remains below the target figure for too long, Mr Weidmann said he saw no signs of such a loss of confidence at the current juncture. Long-run market-based inflation expectations appear to have levelled off at around 1½%, he said, while the survey-based long-run inflation expectations are in any case very close to the targeted inflation rate.

In his speech, Mr Weidmann underlined the importance of repeatedly weighing the upside of the non-standard measures against the risks and potential side-effects they entail. "For the longer monetary policy remains in ultra-easy mode, the greater the collateral damage it might cause," he cautioned.

Presentations and discussions

In two presentations, Carsten-Patrick Meier, managing director of Kiel Economics, and Isabel Schnabel, professor at the University of Bonn and member of the Council of Experts for the Assessment of Overall Economic Trends, highlighted various aspects relating to price stability and financial stability.

Mr Meier's presentation covered the macroeconomic effects of the persistent low interest rate environment. He also presented the results of a model analysis on the effects of various interest rate reductions on the real economy. Professor Schnabel talked about the relationship between price stability and financial stability and also broached the topic of whether monetary policy and banking supervision in the euro area should once again be separated.

Professor Schnabel then took part in a podium discussion with Christopher Ohler, professor at the University of Jena, Ludger Schuknecht from the Federal Ministry of Finance, Helmut Siekmann from the Institute for Monetary and Financial Stability at Goethe University Frankfurt, and Jens Ulbrich, chief economist of the Bundesbank. The discussion centred around the topic of "price stability and financial stability: policy primacy, the legal framework and the laws of economics".

Changes at the head of the Monetary Stability Foundation

Symposium price stability and financial stability ©Alexandra Lechner
The symposium was convened to mark a transition in the management of the Monetary Stability Foundation. The outgoing Chairman of the Foundation's Executive Board, Willy Friedmann, passed on the baton to Gerhard Ziebarth, and the outgoing Chairman of the Council, Hermann Remsperger, made way for his successor Thomas Möllers. Mr Weidmann described the outgoing chairmen as having been a blessing for the foundation. In addition, on behalf of the President of the Federal Republic of Germany, Mr Weidmann bestowed former member of the Bundesbank's Executive Board, Mr Remsperger, with the "Grand Cross 1st class" of the order of merit of the Federal Republic of Germany. Visibly moved by this distinction, Mr Remsperger expressed his gratitude for the accolade. "The success of the foundation has many fathers, and of course also many mothers," he said.

In his address to the symposium, incoming Chairman of the Council, Thomas Möllers, emphasised the importance of the Monetary Stability Foundation in buttressing stability policy. He underscored, in particular, the great contribution and interdisciplinary impact of both outgoing chairmen, Mr Friedmann and Mr Remsperger. The Monetary Stability Foundation was established in 2001 to preserve and promote public awareness of the importance of monetary stability.