By David Barwick – FRANKFURT (EconoStream) – The interview of European Central Bank Governing Council member Jens Weidmann published Thursday in a German newspaper highlights the divergence of monetary policy perspectives in the Eurotower. The comparison with the account of the Council’s last policy meeting suggests differences that run deep.

The Bundesbank’s own account of the interview with business daily Börsenzeitung seemed to reflect a desire to put a collegial spin on its president’s views, with the German central bank’s website carrying a summary under the innocuous title ‘Weidmann: The Monetary Policy Course Is Currently Appropriate’.

However, everything else about the interview made clear that such an assertion was less an endorsement of recent ECB measures – though Weidmann did not stand in the ECB’s way in the initial stage of the crisis - than diplomatically worded opposition to any further steps: the policy stance being appropriate already, there is no need for any ‘recalibration’.

Probably not by accident, Thursday was also the day that the ECB released the account of the monetary policy meeting of September 9-10. As such, the Bundesbank may have seen the interview as an opportunity to set the record straight, or at least more fully reflect the range of viewpoints. The specifics of Weidmann’s perspective stand in marked contrast to the views of many of his Council colleagues and in particular members of the ECB Executive Board.

Based on the two publications, opinions differ particularly sharply on one subject of recent focus. On the one hand, the meeting account reported ‘broad agreement’ that the price-stability implications of the euro’s appreciation needed ‘careful monitoring’. Council members also mostly concurred that ‘it needed to be emphasised that while the euro exchange rate was not a policy target for the ECB, the external value of the euro was an important determinant of inflation developments in the euro area’, and had thus affected the updated staff projections.

Weidmann on the other hand said he ‘wouldn’t exaggerate’ the euro’s appreciation, arguing that it should be seen in the context of more expansive monetary policy in the U.S., economic improvement in Europe and the EU’s anti-crisis measures. For the ECB, medium-term inflation is the decisive element, he reminded. A stronger euro exerts downward price pressures ‘purely mechanically’, he said, but dismissed this as simplistic.

‘We also discussed the topic in the most recent monetary policy meeting and ultimately confirmed our course’, he was quoted as saying. ‘At the moment, I see no reason to turn away from our assessment. The monetary policy stance is at present appropriate.’

Weidmann didn’t acknowledge the possibility of a need to recalibrate – an indispensable mantra for the ECB and most of his colleagues. In response to the notion that doing too much is better than doing too little in a crisis like the current one – an argument advanced last month by Board member Fabio Panetta – he 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.’

Unsurprisingly, the meeting account duly reconfirmed that his colleagues were willing to follow up with more and open as to how. ‘While the PEPP was currently seen as the primary instrument for providing additional monetary policy accommodation, it was noted that further cuts in policy rates and changes to the conditions of the TLTROs were also part of the toolkit for providing additional monetary policy accommodation, if necessary’, it said.

Though he did not exclude further rate cuts in theory, Weidmann made clear that he was not on board. ‘I would urge caution in anticipating decisions that are not now pending and first need to be discussed’, he said. ‘… we should not pre-commit ourselves or raise expectations that we then feel we must meet or even exceed.’

While the meeting account showed the Council to take the  view that economic developments since the June staff projections had been ‘broadly in line’ with these, the overall tone was less sanguine and the dominant sentiment was that ‘risks continued to be tilted to the downside and the strength of the recovery remained surrounded by significant uncertainty.’

Indeed, one or more Council members were sufficiently concerned about the uptick in Covid-19 cases to worry about a materialization of the ECB’s severe macroeconomic scenario.

Weidmann, however, remained irrepressibly optimistic, citing upside fiscal policy risks, observing that the economy had grown at ‘record speed and also faster than expected’ over the summer, and arguing that ‘a slowdown of the kind we are now seeing was to be expected’.

In fact, ‘… confidence in our baseline scenario has increased. That is good news in times of high uncertainty’, he said. 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 affect our baseline scenario.’

Weidmann also used the opportunity of the interview to share his vision of a desirable outcome of the ECB’s newly resumed strategy review, a subject the monetary policy meeting by its nature did not concentrate on. Average inflation targeting demands too much understanding from economic agents and implies dangerously low inflation after a period above target, so that it might turn out to be asymmetric and wind up producing higher-than-expected average inflation, he said.

As for how the ECB defines and formulates price stability, a focus of the review, Weidmann let it be known that he saw the current definition as having merits a straightforward 2% definition did not share. ‘We should not create the impression that we can control inflation in a particular quarter with pinpoint accuracy’, he said.

Although defining price stability as 2% would be ‘clearer and simpler’, he said, he argued that the inflation expectations of households and analysts already indicated comprehension of the ECB’s intentions.

The next monetary policy meeting of the ECB is not until October 29. That Weidmann – and, to be sure, others – are already staking out their positions fits the idea that much of the groundwork for any move by the Governing Council between now and year-end will be laid then, even if the actual decision is likely – though not inevitably so – to be deferred until the subsequent meeting on December 10.

At that point, it will be just over six months since the ECB last took significant action by, most notably, the June 4 expansion of its pandemic emergency purchase programme (PEPP) – the kind of nonstandard measure that monetary authorities seem most apt to have recourse to yet again, and that Weidmann seems most apt to oppose.

Barring a pronounced upside surprise, Council members most inclined to contemplate further action should be more than ready to move by then, potentially with the backing of updated staff forecasts. ECB President Christine Lagarde’s consensus-building skills may be in for their stiffest challenge yet.