Weidmann: Low interest rates won't go on indefinitely

Bundesbank President Jens Weidmann has said that euro area central banks mustn't hesitate to normalise monetary policy when inflation increases. "If price pressures rise, then we have to tighten our monetary policy," he told the Wirtschaftswoche business periodical. In his view, a stability-oriented monetary policy must be geared towards its mandate of preserving price stability: "We can't take any consideration of government financing burdens during the normalisation process."

Heading for the inflation target

Mr Weidmann conceded that the Eurosystem central banks had not yet achieved their medium-term target of lifting the annualised rate of inflation to below, but close to, 2%, but says they are heading in the right direction. "Getting to the finishing line takes time in the aftermath of a financial crisis," he noted. The latest ECB staff projections from September 2017 suggest that euro area consumer price inflation will be 1.5% this year, 1.2% in 2018 and 1.5% in 2019.

The Bundesbank President sees the factors behind the dampened price pressures as no more than temporary phenomena. One of these is government, enterprises and households scaling back their substantial debt levels. Another is the need for banks to tidy up their balance sheets. What's more, he said, it will take time for all the euro area countries to restore their previous levels of competitiveness. All this, he noted, is putting a brake on inflation. Mr Weidmann does, however, see economic activity taking something of an upward trajectory: "We are expecting capacity utilisation to increase and price pressures to rise, opening up the possibility of a return to normal monetary policy."

Quickly tighten the reins once the upturn sets in

Mr Weidmann advocates adopting a symmetrical approach to monetary policy such that it responds to cyclical and consumer price fluctuations in the same fashion. This means markedly easing policy in the event of a downturn or crisis. "That being said, any low-interest-rate phase should not be allowed to persist and, once an upturn sets in, action should be taken to swiftly and rigorously tighten monetary policy again," he stressed.

Weidmann also used the interview to touch upon the debate over adjusting the asset purchase programme. The Eurosystem central banks are still purchasing assets at a monthly pace of 60 billion euro. "Even if we reduce net purchases, our balance sheet holdings continue to increase, and monetary policy remains expansionary," Mr Weidmann emphasised, conceding that "we would not be putting the pedal to the metal to the same degree as before." The Governing Council of the European Central Bank, he said, has agreed that policy rates will only increase once the asset purchases have ended. "To this extent, then, the question of how much leeway monetary policymakers will still have when the next downturn comes is valid."

No sign of a real estate price bubble endangering stability

One consequence of the highly expansionary monetary policy, Mr Weidmann explained, is the strong increase in real estate prices. He reported that property prices in large German cities are 15 to 30% above the Bundesbank's model results. Yet he is seeing no signs of a bubble in which the boom in house prices is accompanied by extravagant lending and greater easing of credit standards on the part of banks.

Mr Weidmann stressed that it would be wrong to judge monetary policy solely on the basis of movements in asset prices. The ECB's mandate, after all, is to keep consumer prices stable. "Monetary policy would be overly encumbered if it were also tasked with controlling individual asset prices," he said, noting that the ECB keeps an eye on financial stability, conducts analyses, gives policymakers advice on how to act and can tighten national measures. "But asset price management should not be added to its list of monetary policy goals as it is not suited for this role."

Keeping the monetary union a union of stability

The Bundesbank President takes a critical view of proposals to extend risk sharing in the euro area. "Although I hear much talk of joint liability, there seems to be little conversation about joint decision-making and control," he remarked. Such proposals must, from a central bank perspective, be assessed in terms of whether they ensure that the monetary union remains a union of stability.

The creation of a European minister of finance, as recently proposed by French President Emmanuel Macron, would not pose a problem for monetary policy in Mr Weidmann's eyes, as any nation state with its own monetary policy will naturally have a finance minister. What matters for the Bundesbank President is how this is arranged. However, it is still not even clear what functions a European minister of finance should have. "Some envisage a fiscal policy taskmaster, whilst others see a generous redistributor of funds with a big budget," Mr Weidmann explained. "A role such as this must fit into the overall framework." Essentially, two paths are available. The first leads back to the Maastricht framework with its limitation of liability and its clear rules. The second heads towards fiscal union, accompanied by a substantial transferral of sovereignty to the European level.

Mr Weidmann pointed out that even those who want increased joint liability are unwilling to give up sovereignty. But it will be impossible to establish a stable fiscal union without a balance between actions and liability: "It won't work for long if one party orders and then leaves the others to foot the bill."

Weidmann suggested making a start by focusing policy on joint projects that deliver tangible progress for society, such as a common market for digital products. Other areas he believes could be explored include securing external borders, combatting terrorism, migration, development aid, environmental protection, and closing corporate tax loopholes.