ECB’s Weidmann: National Debts Must Not Delay Policy Tightening When Needed

15 February 2021

By David Barwick – FRANKFURT (Econostream) – Low interest rates will last for longer but not forever and national government indebtedness must not be allowed to stand in the way of their eventual increase, European Central Bank Governing Council member Jens Weidmann said Friday.

In an interview with German daily Augsburger Allgemeine, Weidmann, who heads the German Bundesbank, said, ‘The phase of low interest rates will last longer. But on the ECB Governing Council, which I belong to, there were differing views about the correct scope of the purchase programme.’

He did not elaborate on the latter point, going on to say that he was convinced that low inflation and correspondingly low interest rates were not permanent fixtures. Central bankers must have the resolve to change course when the time comes without consideration for the financing costs of highly indebted member countries, he said.

Public finances must be put back on sound footing once the pandemic is over, he insisted. It is important for credibility that monetary policy ‘make it clear again and again that it is geared towards price stability and does not take into account the consequences that this has for the sustainability of national debt’, he said.

‘Monetary policy will tighten the reins when the price outlook requires it’, he said. Monetary policy must currently address the fallout from the pandemic and was thus loosened yet again, he said. ‘But when inflation rates increase in the euro area, we will also discuss again the basic orientation of monetary policy.’

While German inflation would temporarily increase to over 3% by year’s end due to government measures, how inflation behaves once public health measures no longer constrain consumption is a matter of debate, he said. Wage increases would be necessary for sustainably higher inflation, he said.

‘In any case, we are keeping a close eye on developments‘, he added. It is clear that inflation would not lastingly stay as low as in 2020, he said.

As for growth, he said, the Bundesbank’s December forecasts need not be ‘fundamentally’ revised, as the recovery will continue if the pandemic is brought under control. The Bundesbank projected growth this year and next of 3% and 4.5%, respectively.

Although Coronavirus new case numbers are still higher than hoped for and mutations are a concern, ‘one cannot ignore the successes achieved’, he said, citing continued spare capacity of the German healthcare system, the approval of effective vaccines and the relatively good overall condition of the economy.

Still, bankruptcies will ‘clearly increase’ as the economic crisis takes a toll in the coming quarters, he said. Given the low starting point, he said, ‘[t]he number of corporate insolvencies is likely to remain far under its historical high.’