In a speech at the Frankfurt Euro Finance Summit, Bundesbank President Jens Weidmann underscored the fact that the pandemic emergency purchase programme (PEPP) is tied to the pandemic, and that it must come to an end once the emergency situation has been overcome. Mr Weidmann sees two preconditions for discontinuing net purchases under the PEPP: “One is the expiry of all key measures introduced to contain the pandemic which restrict economic life.” That, he noted, would be a sign that enough has been done to suppress the pandemic or to overcome the health crisis. Besides, once the restrictions related to the coronavirus have been lifted, they can also no longer exert downward pressure on prices. The second precondition, Mr Weidmann continued, “is an entrenched economic recovery. This is because the economy in the euro area will then have to stay on course without the support of emergency monetary policy measures.” That would not mean that monetary policy and fiscal policy will no longer support economic and price developments, but that the direct coronavirus-related measures should then be rolled back. According to Mr Weidmann, the current projections indicate that economic output in the euro area is already set to exceed its pre-crisis level in the first quarter of 2022, and the underutilisation of aggregate economic capacity in the euro area will arguably cease to be exceptional next year. “That would no longer be a crisis year, in my opinion,” the Bundesbank President remarked.

Gradual scaling back of emergency asset purchases conceivable

While the Eurosystem is unable to set a date for exiting monetary policy crisis mode very far in advance owing to the uncertainty that still persists, “to avoid having to end the PEPP abruptly, net purchases could be scaled back gradually beforehand,” Mr Weidmann said. “It will then become clear whether the overall envelope for the PEPP ended up being used in full or not.”

Germany’s inflation rate only too high for a time

Mr Weidmann also used his speech to outline price developments in Germany. “Many people are worried that the spectre of inflation might return as the economy gets back on its feet, and that’s a concern I take very seriously. However, these inflationary risks should not be overstated,” he said. Inflation in Germany spiked significantly higher at the start of the year, and the Bundesbank’s economists are expecting it to climb still further in the months to come, but this, Mr Weidmann argued, is mainly due to special factors such as the temporary cut in VAT rates in 2020, which will only give inflation a temporary boost. Furthermore, short-term imbalances between supply and demand might also be a factor once the economy opens up again across all sectors, he added. Coronavirus-related catch-up effects in consumption are likewise unlikely to drive up inflation for good. “For inflation to become persistently too high, it would be crucial for second round effects – in the form of much stronger wage growth or noticeably higher inflation expectations – to be at play,” Mr Weidmann explained, and he sees no signs of that at present. That, he explained, is why the Bundesbank’s experts are expecting inflation rates in Germany to be below 2% over the next few years.

A similar pattern is expected by Eurosystem staff for prices in the euro area. In light of the medium-term price outlook in the euro area, the Bundesbank President continues to expect monetary policy to remain highly accommodative overall even after the crisis has come to an end. In Mr Weidmann’s view, the risks surrounding the price outlook are skewed to the upside in both Germany and the euro area. Those include the risk of a stronger-than-expected rise in energy prices if, say, the oil price does not decrease as expected or if policymakers take additional climate protection measures. “Central banks should not just be on the lookout for potential deflationary risks; we need to be vigilant in both directions,” said Mr Weidmann.