Weidmann: No evidence that non-standard monetary policy measures have increased distributional inequality

Bundesbank President Jens Weidmann has responded to critics claiming that non-standard monetary policy measures are widening the gap between rich and poor. Speaking at the 26th German Savings Banks Conference in Hamburg, he called this a theory which is not backed up by research. While it is true that research has generally found that non-standard monetary policy measures have increased wealth inequality in the short term by driving up asset prices, “the medium to long-term effects are not completely clear,” Mr Weidmann told the roughly 1,500 guests at the event.

Since 2007, the Eurosystem has been conducting a raft of non-standard measures, including programmes which have seen the Eurosystem purchase certain types of asset since 2009. Critics warn that wealthier households have been the main beneficiaries of these asset purchase programmes by central banks, since they typically own shares and real estate. The concern here is that the non-standard measures could have pushed up the prices of these assets.

Wealth inequality no greater

The Bundesbank President explained that the Bundesbank’s latest survey on household wealth in Germany corroborates the research findings on this topic, noting that wealth inequality showed no clear trend between the 2014 and 2017 survey waves. “However, if the exceptionally accommodative monetary policy stance had strongly widened the gap between wealthy and less wealthy people in Germany, I expect this would have shown up in the overall data,” Mr Weidmann argued. 
In actual fact, he continued, the non-standard measures, much like conventional interest rate policy, are more likely to have reduced income inequality. “You see, without the non-standard monetary policy measures, overall economic growth would likely have been weaker, employment would have grown at a slower pace, and unemployment would have decreased more sluggishly,” he said.

Over the last few years, wealth levels in Germany have risen on a broad basis on the back of strong economic growth. Stronger rates of saving and higher incomes were probably instrumental in these wealth gains, particularly those observed among less wealthy households, Mr Weidmann told his audience, pointing to the decline of 4 percentage points in the proportion of households unable to save due to a lack of financial resources. “This will probably have been one major outcome of the upbeat trend in the labour market,” he argued.

In any case, the prolonged period of low interest rates has done nothing to dampen households’ propensity to save,” Mr Weidmann said, though he did concede that the spell of low interest rates is associated with risks and side effects which might impact on financial stability. Thus, financial market actors in particular might be tempted to take greater risks in search of higher yields. “Over time, this approach could cause risks to financial stability to build up,” he observed. The Bundesbank President also drew attention to the fact that smaller and medium-sized banks in particular are currently exposed to substantial interest rate risk. He elaborated on this point by explaining that many bank customers have taken advantage of low rates to prolong the interest rate fixation period of their loans, particularly those for house purchase, and how, for banks, this is widening the gap in the interest rate fixation period between their short-term deposits and long-term loans. “An abrupt interest rate rise would immediately drive up their funding costs, but their interest income would increase only gradually,” he said.

Only losers in trade wars

The Bundesbank President also used his speech to warn against a further escalation of the trade conflict between the United States and China. Citing a model-based analysis by the Bundesbank, he explained that the trade barriers already adopted could, on their own, shrink both countries’ respective output levels by 0.5 % over the medium term and reduce world trade by 1%. The Bank’s research suggests that Germany might also be affected, albeit to a lesser degree. No one, he said, should harbour any illusions that the economy might benefit as a whole from the conflict due to the rerouting of trade flows. “There are only losers in trade wars,” Mr Weidmann declared.

With the United States threatening to impose additional tariffs on auto imports, Mr Weidmann stressed the importance of a strong Europe. Additional tariffs would hit German car makers hard, he explained, given that motor vehicles and motor vehicle parts worth €27 billion were exported to the United States in 2018. In negotiations with trading partners, it is not just a matter of Europeans safeguarding their own interests. After all, bilateral agreements can never take the place of the rules-based multilateral trading system – “hence the importance of preserving the global trade order and making it fit for purpose,” Mr Weidmann concluded.