Weidmann: ECB Governing Council has gone too far

Bundesbank President Jens Weidmann says that the ECB Governing Council has gone too far with its comprehensive package of monetary policy easing. “You see, the economic situation is not all that bad, wages are growing strongly, and the spectre of deflation – that is, of persistently contracting prices and wages – is nowhere to be seen,” he said in an interview with Germany’s “BILD-Zeitung” newspaper. Mr Weidmann said that the measures adopted by the Governing Council came in response to the slowdown in economic activity in Germany and across the rest of the euro area and an associated further downgrade of the ECB’s inflation outlook.

The Governing Council used last Thursday’s meeting to adopt a variety of monetary policy measures with a view to stimulating activity and thus inflationary pressures in the euro area. One decision was to lower the interest rate on bank deposits with Eurosystem central banks by 10 basis points from -0.40% to -0.50%. Another was to introduce a two-tier system for reserve remuneration which will exempt part of banks’ holdings of excess liquidity from the negative deposit facility rate. The Governing Council furthermore decided to resume net purchases under the asset purchase programme (APP). Starting on 1 November, euro area central banks will purchase government bonds and other assets at a monthly pace of €20 billion. The governors did not set a time limit for these purchases. Another decision saw the Governing Council introduce more accommodative terms for targeted longer-term refinancing operations (TLTROs) so as to make it even more attractive for banks to borrow funds from the central bank. 

Don’t put off interest rate increases any longer than necessary

In Mr Weidmann’s view, the package of measures need not have been as far-reaching to support inflationary pressures in the euro area. “What’s clear from this decision is that low interest rates are going to be sticking around for quite some time to come,” he remarked, adding that “What matters to me is the prospect of scaling back the expansionary monetary policy when the outlook for inflation is amenable.” But the ECB Governing Council has made a long-term commitment with its most recent decisions.

Increasingly difficult to exit

The Bundesbank President used his interview with “BILD-Zeitung” to defend the general thrust of the monetary policy accommodation in recent years, calling it “appropriate”. His concern is that monetary policy does not become harnessed to fiscal policy, because that jeopardises the central bank’s ability to keep prices stable. “The decision to buy even more government bonds has exacerbated this risk, and it is becoming increasingly difficult for the ECB to exit this policy.”

Weidmann conceded that the current monetary policy stance is placing a strain on savers, noting that “generally speaking, it will be more difficult to provide for old age without taking on more risk”. But even if interest rates are low, it is always a good idea to put some money away for later and to provide for old age.