Bundesbank Board Member Balz: Rates To Be Hiked When Inflation Warrants It

3 February 2021

By David Barwick – FRANKFURT (EconoStream) – German Bundesbank Board Member Burkhard Balz on Wednesday conceded the current importance of accommodative monetary policy but reminded that interest rates would be hiked when the inflation situation changed.

In remarks at the German central bank’s Duesseldorf branch, a text of which was made available by the Bundesbank, Balz said that ‘an expansive monetary policy stance is indispensable to maintain the favourable financing conditions in the economy during the pandemic.’

Noting the ECB’s staff projection calling for HICP this year of 1% in the euro area, Balz said that inflationary pressures ‘are likely according to this prognosis to remain restrained in the coming years, too.’

The Governing Council thus assumes that no interest rate hikes will be forthcoming until inflation prospects are ‘clearly’ close to a level ‘sufficiently near’ but below 2% and core inflation reflects this, he said.

So as not to create ‘false expectations’, central bankers must leave no doubt that interest rates will be hiked when price developments require this, he said.

‘That is not likely to please everyone’, he said. ‘Political pressure for the Eurosystem to keep interest rates low for longer than necessary could arise. But when the inflation outlook demands it, the normalisation of monetary policy cannot fail to take place out of consideration for the financing costs of governments.’

Balz reiterated the Bundesbank’s insistence that the ECB’s pandemic emergency purchase programme be limited in duration and application to the crisis.