ECB’s Weidmann: Economy Has Bottomed Out, Recovery Only Gradual

21 June 2020

By David Barwick – FRANKFURT (EconoStream) – The economy has bottomed out and is in the process of gradually recovering, European Central Bank Governing Council member Jens Weidmann said on Sunday.

In an interview with German daily Frankfurter Allgemeine Zeitung, Weidmann, who heads the Bundesbank, said that disinflationary tendencies outweighed inflationary impulses, but that when the time came to withdraw stimulus, the tightening would need to take place punctually and without regard to government financing costs.

‘The good news is: the trough should be behind us now and things are looking up’, he said of the economy. ‘But the abrupt decline is being followed only by a relatively gradual recovery.’

Although price developments are being impacted by competing effects, the downward pressure is stronger due to energy, he said. German inflation would be boosted next year with the retraction of the value added tax cut enacted to mitigate the crisis this year, he predicted. Inflation developments are however subject to very high uncertainty, he added.

Weidmann confirmed his agreement in principle with a ‘strong monetary policy stimulus’, given the situation. The temporary, crisis-related nature of the ECB’s pandemic emergency purchase programme (PEPP) was important to him, he said.

Noting the PEPP’s built-in flexibility, Weidmann said this was ‘intensively discussed’ on the Governing Council, but ‘we agreed that monetary policy has to react.’ The volume and degree of flexibility of the PEPP will be the subject of repeated consideration, in the context of which, he said, he was ‘certainly more reserved than others.’

When the time comes, monetary policy has to ‘promptly change course again so as not to overshoot the goal’, he said. Price stability considerations should guide monetary authorities, and the outlook is currently very unclear, he said.

‘Precisely this was one of the facets of our discussion: For how long do we set the course? For how long does it commit us, and what problems does it create?’ he said.

Weidmann emphasised the importance of not letting monetary policy become subordinate to fiscal policy as a consequence of sovereign bond purchases. Government debt financing costs mustn’t delay monetary policy normalisation when called for by inflation developments, he said.

Still, he made it clear that it would take some time before tighter policy was on the agenda, and even then, he said, the new normal with respect to interest rates ‘is likely to turn out lower than what we have been accustomed to.’ There are structural reasons behind the long-term global trend toward lower rates, he said.

Weidmann declined to speculate about a potential expansion of the ECB’s asset purchases to include stocks, preferring not to feed expectations that might be disappointed.

The current crisis warrants European solidarity, even financially, he said, though he warned against ‘substantial, long-term mutual indebtedness’.