Virtual keynote speech on the occasion of the 70th anniversary of the Institute of the German Economy ©Nils Thies

Weidmann: Risks to the price outlook currently tilted to the upside

Bundesbank President Jens Weidmann sees price pressure in Germany picking up over the coming months. “For Germany, we are expecting rates that might head towards the 5% mark at year-end,” he said at the Bundesbank symposium “Banking supervision in dialogue”. But, he noted, the upside pressure on prices is mainly the result of transitory factors, like the increase in crude oil prices and the return to higher VAT rates. Once these effects expire, the inflation rate will abate again – in Germany and in the euro area as a whole. “We do, however, also need to keep an eye on the risks to the price outlook. In my view, the risks are tilted to the upside right now,” Mr Weidmann emphasised. One risk is that supply bottlenecks might trigger additional price surges. Another concerns the savings accumulated during the pandemic, which, Mr Weidmann cautioned, households might channel into consumption to a greater extent than expected. “And if these transitory factors lead to higher inflation expectations and accelerated wage growth, the rate of inflation could rise perceptibly over the longer term as well.”

Gradually wind down the PEPP

Mr Weidmann explained that the persistence of the increased inflationary pressures in the euro area is a key issue for the ECB Governing Council. Most recently, the euro area inflation forecast for the next few years has been significantly below the target rate of 2%, which is why an expansionary monetary policy is still appropriate. However, this does not mean that the risk of excessively high inflation should be ignored, Mr Weidmann warned. “In light of the prevailing uncertainty, we should not commit to our very loose monetary policy stance for too long,” he said, adding that he had made the case for this at the Governing Council’s discussion on forward guidance.

Furthermore, Mr Weidmann called for the pandemic emergency purchase programme (PEPP) to be brought to an end as soon as the pandemic crisis has been overcome. “Due to the ongoing uncertainty, it is impossible to say very far in advance when the PEPP will be terminated,” Mr Weidmann said. “So that net purchases under the programme do not then have to be brought to an abrupt stop, they should, in my opinion, be gradually wound down as and when the situation allows.”

Banking system in robust shape

Another speaker at the Bundesbank symposium was Executive Board member Joachim Wuermeling, who used his speech to highlight the changes that lie ahead for the German banking community. “The transformation of the economy through the structural change that will take place in the wake of the coronavirus crisis, as well as digitalisation and decarbonisation, will require gigantic amounts of investment and credit,” he said, warning that German banks were hardly prepared to meet this new, and differently configured, demand for credit. He called on banks looking to play a part in the transformation to review and adapt their financing instruments.

The panel sessions embedded in the symposium covered a variety of topics, including banking business in a post-coronavirus world, digitalisation and sustainability. Karen Braun-Munzinger, Deputy Director General Banking and Financial Supervision at the Bundesbank, devoted her keynote speech to topics including the risks to banks from climate change. Other speakers included Joachim Lang, Director General of the Federation of German Industries, and Christoph Bornschein, founder and managing director of a digital business.