ECB Brief: Weidmann Comments on Defining Crisis Phase, Using the APP and Ending the PEPP

17 June 2021

By David Barwick – FRANKFURT (Econostream) – This is a quick take on comments made Thursday by European Central Bank Governing Council member Jens Weidmann, President of the German Bundesbank, in German business daily Handelsblatt:

• Overall, Weidmann expresses views consistent with his relatively hawkish philosophy, but it is more the case that he hopes/believes that policy measures can be scaled back before too long rather than that he clearly expects this or is calling for it with urgency. Doves however may not be entirely happy with his view of how to define the end of the crisis phase.
• Calls accommodative monetary policy ‘still the right thing to do at the moment’, given projected inflation ‘noticeably below 2% in 2022 and 2023’.
• Cautions that ‘a somewhat stronger price development is possible’ and hopes that crisis measures will ‘soon be scaled back’ as the pandemic is further contained. However, he doesn’t see dynamic wage developments, which he would want to see to expect stubbornly high inflation.
• Shows himself to be ‘quite optimistic’ about overcoming the crisis and then being ‘able to moderate purchases more cautiously.’
• Says ‘the monthly ups and downs of purchases’ don’t matter as much as the total volume; notes some opposition to last week’s decision by the Council but fails to be explicit about his own stand.
• As to end of PEPP, acknowledges environment of uncertainty ‘in both directions’ and thus prefers not to engage in ‘longer-term predictions’ – interesting parallel to Lagarde’s dismissal of speculation about tapering as one of ‘those longer-term issues’.
• Says precise timing of communication of PEPP end is less important than being clear and convincing when the time comes.
• Repeats that PEPP must end when emergency is over. This he has said on numerous occasions.
• The PEPP’s flexibility would be inappropriate once the emergency is over – that would seem to be directed at the idea of equipping the APP with the PEPP’s characteristic.
• Opposes having APP simply pick up where the PEPP leaves off; the two ‘should be considered separately.’
• Says that although the pandemic is not yet over, given for example virus mutations, the economy ‘should now recover quite quickly.’
• Lists preconditions for end of crisis phase: lifting of ‘essential’ pandemic containment measures and ‘a consolidated recovery of the economy.’
• Rejects making a return of projected inflation to pre-pandemic levels a criterium for the end of the crisis phase.
• Agrees that support should not be withdrawn prematurely, but adds that there should be no ‘unusual underutilisation of capacity next year’ even if monetary policy support is reduced previously.