ECB’s Weidmann: Doubts About Bond Purchases Decided on December 10

31 December 2020

By David Barwick – FRANKFURT (Econostream) – Monetary policy has limited possibilities in the current situation and the decisions taken by the European Central Bank Governing Council on December 10 are questionable, Council member Jens Weidmann said Thursday.

In an interview with German daily Rheinische Post, Weidmann, who heads the German Bundesbank, said that the outlook for inflation meant that it could take some time before interest rates need hiking.

‘The possibilities of monetary policy are limited at present’, he said, observing that even under low interest rates, consumer are unable to spend at closed businesses. This means fiscal policy is called on, he said.

‘The central banks contribute above all to keeping financing conditions favorable and preventing a credit crunch that would exacerbate the crisis’, he said. ‘Otherwise, inflation would move yet further away from our target and price stability would be endangered.’

‘So I consider monetary policy support necessary, but do indeed have doubts about the extent of the new bond purchases that were decided’, he said. ‘Moreover, it is important that these measures too must be unwound when the emergency they were taken for is over.’

Politicians should not assume that interest rates will always remain low; when inflation prospects demand it, policy must be tightened, he said. But the weak outlook for prices suggests that higher interest rates might not come for some time, he said.

Although inflation in Germany could exceed 2% in the second half of the year, in the euro area in general it would remain ‘rather subdued’, he said.

Weidmann noted that uncertainty remained high, but added that this worked both ways. The surprisingly strong second wave and the more infectious mutation of the virus are one aspect, with the faster availability of vaccines another, he explained.

In view of the rapid rebound of the economy after the first lockdown, the second wave of the pandemic was no reason to question the forecasts of early December, he said. Asked if the second wave would not do much more damage, he replied, ‘At the moment, I am not operating on that assumption.’

In particular, he continued, the restrictions on the economy are not as comprehensive as in the spring, companies have learnt to deal with the situation and vaccination is underway.