Bundesbank Board Member Balz: Important for Financing Conditions to Move With Recovery

28 April, 2021

By David Barwick – FRANKFURT (Econostream) – German Bundesbank Board member Burkhard Balz on Wednesday said that rather than preserving a specific level of market interest rates, monetary policy needed to focus on keeping financing conditions, which should move with the recovery, from tightening prematurely.

In an online speech, Balz, noting the ‘still historically low’ cost of financing, said that it was important for the Bundesbank that ‘financing conditions can develop in line with the economic recovery in the euro area, which is also determined by the international environment.’

He rejected the idea of maintaining any particular level of rates. Rather, he said, ‘[t]he point is to prevent a premature deterioration of financing conditions in order to counteract the downward pressure of the pandemic on projected price developments.’

At the same time, he insisted, once the crisis is over, the ECB’s emergency measures must come to an end. ‘And if the price outlook demands it, the expansionary orientation of monetary policy must be withdrawn altogether’, he said. ‘But that is not yet the case.’

Favourable financing conditions have a particular importance, but interest rate increases on capital markets can occur for different reasons that ‘in turn can justify different monetary policy responses’, he said.

Were inflation expectations to converge toward the ECB’s price stability objective, a corresponding increase in nominal interest rates ‘would be welcome’, he said. ‘For it would be a sign that monetary policy measures are working.’

‘Other fundamentals could also improve without leading to a deterioration in financing conditions that monetary policy would have to counter: when the economic outlook brightens, real interest rates rise’, he said.

Balz said that it would ‘probably be a while before higher key interest rates are back on the agenda, and the normal level in the future is also likely to be somewhat lower than what we were used to in the past.’

Despite the hope that has come with vaccination efforts, uncertainty about the pandemic and the recovery remains high, he said. Depending on the evolution of the pandemic, recovery could be delayed, he said.

‘However, once the pandemic is brought under control and the measures to contain it are gradually eased, the euro area economies should recover quickly’, he predicted. Private consumption would to some degree be driven by pent-up demand, though to some extent this could also boost prices, he said, citing restaurants and package holidays.

But this might not be the case, and even if so, would be a temporary phenomenon, he said. ‘A permanent, stronger increase in inflation would require noticeably higher wage growth. We are not observing this at present. However, it is important to remain vigilant and to monitor developments closely.’