ECB’s Weidmann: Monetary Policy Must Remain Expansionary

20 October 2020

By David Barwick – FRANKFURT (EconoStream) – Monetary policy in the euro area has to remain accommodative so as to avoid the threat of feedback loops, European Central Bank Governing Council member Jens Weidmann said on Monday.

In a speech delivered virtually for Harvard University, Weidmann, according to a text provided by the Bundesbank, which he heads, warned against letting public finances deteriorate so much as to lead to a situation of fiscal dominance.

‘With respect to monetary policy, it is important to remain expansionary, as the economic slump dampens the inflation outlook and a lack of liquidity in the financial system might dangerously aggravate the crisis’, he said. ‘Otherwise, harmful feedback loops could emerge and ultimately jeopardise price stability.’

So that government deficits can retreat post-crisis, the measures taken to mitigate the crisis should be temporary, he said. Among other reasons, sound public finances are more consistent with independent central banks, he said.

‘The higher the level of public debt, the harder it may become for monetary policymakers to raise key interest rates if the price outlook requires it’, he argued. ‘Central banks might increasingly come under pressure to keep government financing costs low. Ultimately, they could find themselves in a regime of fiscal dominance in which central banks ensure sovereign solvency and factually lose their independence.’

At the same time as governments take steps to stabilise their economies, the importance of allowing necessary structural change to occur implies a continuous evaluation of anti-crisis measures’ side effects, he said.