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Non-standard monetary policy should not become the “new normal”

Non-standard monetary policy should not become the “new normal”

20.11.2018

Bundesbank President Jens Weidmann believes that non-standard instruments should not become part of the monetary policy toolkit under normal monetary policy conditions. At the European Banking Congress in Frankfurt am Main, Weidmann said: “Until it is proven that a return to the pre-crisis framework constrains effectiveness of monetary policy in a non-trivial way, I see no reason to depart from the pre-crisis framework.” He added that, although sovereign bond purchases were a legitimate monetary policy instrument, they were, in the context of a monetary union with national fiscal policy, “an instrument which should only be used in exceptional cases to fend off a deflationary spiral.

Adhere to established guidelines

In his speech, the Bundesbank president advocated adhering to established guidelines. In his view, this includes the mandate of price stability, which should be interpreted narrowly, and also the principle of an open market economy with free competition. According to Weidmann, effectiveness in securing price stability was the primary criterion for evaluating the appropriateness of a monetary policy measure, yet “the set of monetary policy instruments we use has to leave enough room for private sector market activities.” The central bank’s balance sheet should therefore be, in Weidmann’s view, “as large as necessary to give monetary policy sufficient power to ensure price stability and as lean as possible so that, in pursuit of its goal, it does not overly impede market activity”.

Moreover, he warned against rushing to make non-standard measures the “new normal”. “If and how monetary policy should adapt its toolbox can only be assessed after we have progressed on the path of normalisation,Weidmann said. Any central bank intervention would have to be demonstrated to be superior to other solutions and covered by the monetary policy mandate.

Draghi: Completion of the banking union is important

ECB President Mario Draghi also spoke at the conference. With regard to the Eurosystem’s asset purchase programme, he reiterated that net asset purchases were anticipated to come to an end in December. He noted that, in October, the Governing Council of the ECB had confirmed its confidence in the economic outlook, although uncertainties had risen. Only upon presentation of the latest round of projections in December would the Governing Council be better placed to make a full assessment of the risks to growth and inflation arising from current developments.  

Draghi also called for a greater sense of urgency in advancing the banking union and the planned capital markets union. In his words, “The completion of the banking union in all its dimensions, including risk reduction, and the start of the capital markets union through implementing all ongoing initiatives by 2019, have now become as urgent as the first steps were in euro area crisis management seven years ago”.

A budget for the euro area

German Federal Finance Minister Olaf Scholz, in a discussion with journalist Wulf Schmiese, called for joint non-central banking instruments to be developed in order to deal with cyclical crises. Scholz also went into the topic of a joint euro area budget. “We are at the cusp of developing a joint Franco-German solution,” he said. Referring to Italy’s high level of indebtedness, Scholz invoked the principle of individual responsibility, noting that reducing the deficit was, first and foremost, a task for the Italian government to contend with.

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