Weidmann: "Bond purchases are an emergency tool"

Bundesbank President Jens Weidmann has spoken out in favour of making an orderly exit from the asset purchase programme pursued by the European Central Bank (ECB). To avoid causing needless turmoil in the financial markets, the programme should be gradually tapered and flanked by appropriate communication, he told interviewers from the German Börsen-Zeitung newspaper. He sees no pressing case, from a monetary policy perspective, to extend the purchase programme yet again. Government bond purchases, he said, should only be used as an emergency tool.

No need to keep putting the pedal to the metal

In the Bundesbank President's view, the monetary policy stance in the euro area will remain highly accommodative even if the asset purchases are scaled back, and the asset holdings on central banks' balance sheets, which are what determine the degree of accommodation, will stay very substantial. Monetary policy will therefore continue to be supportive of economic activity and price developments for quite some time to come. “We just wouldn’t be putting the pedal ever more to the metal,” he said.

The ECB’s asset purchase programme is subject to a number of self-imposed rules. One is that the central bank is prevented from buying more than one-third of a particular bond or of the bonds from a single issuer. Another is that the purchases must be allocated to each country in accordance with the ECB capital key. Mr Weidmann stressed the crucial role these rules play in preserving central bank independence and criticised what he felt was sometimes careless talk about changing the parameters, which could have severe negative repercussions. “A clear sense of scepticism is also apparent in the Federal Constitutional Court’s decision to refer the government bond purchase programme to the European Court of Justice,” said the Bundesbank President. 

Debate about higher inflation target weakening adherence to rules

Mr Weidmann also commented on the discussion over whether the ECB’s current inflation target of just under 2 % should be raised to between 3 % and 4 %. This is a frequent talking point among academics and even some central bankers. In Mr Weidmann's view, a higher inflation target would not ultimately deliver any net benefits because the temporary boost provided by lower real interest rates would come at the cost of a lasting increase in the cost of inflation. And that might even make it more difficult for central banks to manage inflation expectations because they could be expected to repeat this “feat”, he warned. “For the sake of your own credibility, you should have this discussion once you have achieved your target and not before,” he emphasised, with particular reference to the euro area. 

Cyberattacks pose a new type of threat

Ten years on from the financial crisis, Mr Weidmann said he is convinced the financial system is more robust today than it was before the crisis. Yet he admitted that new types of risk, such as cyberattacks, have emerged. “As supervisors, a major topic on our agenda at the moment is the increased vulnerability – of governments, banks and businesses – to a potential interest rate hike,” he commented. In this context, he warned against unwinding existing regulatory requirements, arguing that it is essential that joint agreements are put into action – “and not just to the letter, but also in spirit.

Challenges for banking supervisors

Mr Weidmann also used the interview to outline his position on the impact of Brexit for banking supervisors, explaining that the UK’s withdrawal from the EU would see institutions move to Frankfurt whose balance sheets are not only very large, but also highly complex. “As supervisors, this will present us with fresh challenges,” he noted. “This is why we are expanding our supervisory capacities at the Bundesbank and the ECB.