ECB’s Weidmann: Shouldn’t Make Too Much of Euro’s Appreciation

9 October 2020

By David Barwick – FRANKFURT (EconoStream) – The strengthening of the euro shouldn’t be made too much of, European Central Bank Governing Council member Jens Weidmann said on Thursday.

In an interview with German business daily Börsenzeitung, Weidmann called the ECB’s current policy stance appropriate and argued against any imminent need to follow up with more action.

He ‘wouldn’t exaggerate’ the recent euro appreciation, Weidmann said, arguing that the common currency’s rise needed to be seen in the context of its causes. These included more expansive monetary policy in the U.S., economic improvement in Europe and the EU’s anti-crisis measures, he said.

For the ECB, medium-term inflation is the decisive element, he reminded. A stronger euro exerts downward price pressures ‘purely mechanically’, he said, but this is overly simplistic. ‘We also discussed the topic in the most recent monetary policy meeting and ultimately confirmed our course. At the moment, I see no reason to turn away from our assessment. The monetary policy stance is at present appropriate.’

In response to the notion that in a crisis as the current one, doing too much was better than doing too little – an argument made last month by ECB Executive Board member Fabio Panetta – Weidmann said the ECB’s strong response under the extreme uncertainty of the initial outbreak was correct, ‘[b]ut from that it does not follow that monetary policy has to constantly follow up with more.’

Fiscal policy has more appropriate tools and the uncertainty is no longer as great, he added.

As to expectations of a renewed expansion of the ECB’s pandemic emergency purchase programme (PEPP), Weidmann said he ‘would urge caution in anticipating decisions that are not now pending and first need to be discussed.’

Pressed as to whether his comment was addressed to financial markets or his Governing Council colleagues, he noted that monetary policy customarily involves closely examining incoming information, adjusting forecasts and deciding whether action is called for. The ECB demonstrated its ability to act when the pandemic struck, he said.

‘At the same time, however, we should not pre-commit ourselves or raise expectations that we then feel we must meet or even exceed’, he said. ‘As far as the PEPP is concerned, we adopted the PEPP as an extraordinary crisis instrument. That was clearly communicated and the Governing Council should remain reliable.’

The ECB's asset purchase programme (APP) is actually the tool with which the ECB should achieve the desired level of monetary accommodation when near the lower bound, he said. The PEPP should end when the crisis ends and must not become a ‘permanent institution’, he said.

The Governing Council considers the so-called reverse rate not to have been reached yet, he said with respect to conventional policy. ‘Further interest rate cuts are thus possible’, he said.

For the ECB to buy stocks, on the other hand, ‘is hardly compatible with the mission of the Eurosystem and its independence’, he said.

Asked whether the Eurozone economy’s deceleration and the resurgence of the pandemic led him to fear a new recession or even deflation, Weidmann showed no trace of concern, observing that the economy had grown at ‘record speed and also faster than expected’ over the summer.

‘However, a slowdown of the kind we are now seeing was to be expected’, he continued. Activity remains subject to restrictions, ‘[b]ut the economic recovery is continuing. And confidence in our baseline scenario has increased. That is good news in times of high uncertainty.’

The increasing Covid-19 case numbers - ‘a certain flare-up’, in his words – ‘would be absolutely consistent with our forecast’, he said. ‘Inasmuch, current developments do not yet rock our baseline scenario.’

Experience gained to date allows authorities to take more precise and thus not as sweeping countermeasures, he argued. Still, he conceded, public health developments in the U.S. and parts of Europe are a risk.

On the other hand, he noted, the Next Generation EU recovery fund and the €100 billion French recovery plan unveiled last month had not been considered in the ECB’s last macroeconomic forecasts. The euro area’s economy could thus overshoot the baseline scenario, he said.

In the context of the ECB’s newly resumed strategy review, Weidmann expressed doubts about average inflation targeting. The idea demands too much understanding from economic agents and faces the practical problem of implying dangerously low inflation after a period of above-target price growth.

‘What central bank will risk a recession by clearly raising rates just to compensate for the too-high inflation of the past?’ he asked. Average inflation targeting might thus turn out to be asymmetric and ultimately result in higher-than-expected average inflation, he said.

The strategy review should address the correct measurement of inflation, he said, noting the existence of ‘good reasons’ to include owner-occupied housing. But how the ECB defines and formulates price stability is at the center of the review, he said.

‘Here I am committed to ensuring that we formulate our goal in a comprehensible and realistic way’, he said. ‘We should not create the impression that we can control inflation in a particular quarter with pinpoint accuracy.’

Defining price stability as 2% would be ‘clearer and simpler’ than the current definition, he said, though he pointed out that the inflation expectations of households and analysts indicated comprehension of the ECB’s intentions.

‘Moreover, the Governing Council deliberately formulated the objective and the time horizon vaguely’, he said. ‘Monetary policy operates with variable time lags. It is important to address this in the formulation of the objective, including through a medium-term orientation.’