Speech by Jens Weidmann

Weidmann underscores risks of extensive government bond purchases

Bundesbank President Jens Weidmann sees a need for monetary policy action stemming from the subdued medium-term inflation in the euro area. However, he also considers it crucial that the share of outstanding government bonds held by central banks does not become too large. “Otherwise, we would be running the risk of gaining a dominant market influence and smoothing out the differences in risk premia for government bonds,” Mr Weidmann said in a speech delivered virtually at the Humboldt University in Berlin. This problem, in particular, is being exacerbated once more by the recent expansion of the PEPP, he stated. When this emergency purchase programme was launched, it was just as important to him that it have a time limit and be clearly linked to the crisis. “We need to ensure that the monetary policy emergency measures do not become a permanent fixture: they have to be scaled back once the crisis ends,” Mr Weidmann cautioned. The Bundesbank President also argued that monetary policy must return to a normal path overall if the price outlook requires it. But because of the increased levels of debt borne by governments, monetary policy could subsequently face growing pressure to keep interest rates low for longer. He reasons that central banks need to make it clear now that they will not succumb to such pressure.

German economy: return to pre-crisis level in early 2022

According to Mr Weidmann, the second wave of infections and the recent tightening of measures to contain the pandemic could, in the short term, put a somewhat greater strain on the German economy than estimated in the Bundesbank forecast published last week. Nevertheless, he said, from the present perspective it is still plausible that medical advances from spring 2021 onwards will make it possible to relax the containment measures. “The recovery is then likely to pick up speed again. In line with this, the German economy can still reach its pre-crisis level in early 2022, as expected in the projection.” However, Mr Weidmann noted the high level of uncertainty about the course of the pandemic and its economic fallout.

Independence in times of low inflation

In his speech, Mr Weidmann warned against calling central bank independence into question against the backdrop of persistently low inflation. Some seemed to believe that central bank independence has become superfluous in a world of low inflation, as monetary and fiscal policy would, in any case, be working towards the same end. “We should not fall prey to the illusion that monetary and fiscal policy will always pull together,” Mr Weidmann cautioned. He also warned central banks of the risk of becoming enmeshed in politics and being overburdened with an ever-growing list of new desires and objectives, the more broadly they interpret their mandate. “Sooner or later, their independence would be called into question – and rightly so, in my view.” This path would do a disservice to price stability. For this reason, Mr Weidmann stated that central banks have to maintain the necessary distance from fiscal policy, noting that the same goes for economic policy and climate policy as well.

Climate action and monetary policy

Mr Weidmann made it clear that mitigating climate change is one of the greatest challenges of our day and that central banks also have to play their part in the fight against climate change. “All of us can and should do more, including central banks. Above all, we need to better understand the implications climate change may have for monetary policy, because we have to be able to maintain price stability in the future, too,” Mr Weidmann said. However, it is not our task as a central bank to penalise or subsidise certain industries, he continued. “Such decisions significantly alter the distribution of resources and income and thus require strong democratic legitimacy,” the Bundesbank President argued. In order to curb climate change, he believes that a higher price for carbon emissions is crucial. “Monetary policy is not a suitable substitute for an ambitious carbon price and a consistent, credible climate policy,” Mr Weidmann reasoned, stressing that the Eurosystem could act as a catalyst for the “greening” of the financial system whilst also supporting climate policies in the EU, with no potential conflict between this and its own tasks.