ECB’s Weidmann: Newly Worded Forward Guidance Went Too Far

23 July 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank’s revision of its forward guidance based on the new strategy framework went too far, ECB Governing Council member and German Bundesbank President Jens Weidmann said Friday.

‘We agree in the Governing Council that an expansionary monetary policy is appropriate at the moment’, he said in an interview with German daily Frankfurter Allgemeine Zeitung. ‘However, I felt that the potentially too long continuation of the low interest rate environment went too far.’

Weidmann and National Bank of Belgium Governor Pierre Wunsch were the lone holdouts to oppose the new forward guidance agreed by the Governing Council on Thursday.

Weidmann predicted that inflation rates would ‘rise sharply for the time being’, heading ‘towards 5%’ at the end of the year. ‘However, temporary effects are mainly at work here’, he said. ‘Inflation rates will therefore certainly fall again significantly further out.’

Still, what path future inflation will take is uncertain, he added. Supply constraints ‘could prove more persistent’, while consumption put off during the pandemic could exert higher price pressures, boosting expectations and wages, he argued.

In addition, climate targets imply a higher CO2 price that ‘will drive up energy prices for many years’, he said. The ECB’s inclusion of owner-occupied housing would also raise inflation , he pointed out.

‘Of course, one can assess all these factors differently, but we should keep a close eye on them’, he said.

On the other hand, despite the ‘strong recovery of the economy’ now taking place, in principle positive for inflation, ‘we also know that in the euro area the inflation rate has recently reacted only little to a higher utilisation of production capacities’, he said.

The new inflation objective of the ECB is ‘neither a shift towards significantly higher inflation rates nor a dramatic change of course’, he said, but simply more easily explained and in line with ‘common practice among central banks.’

As for the possibility of above-target inflation, ‘a temporary, slight overshooting of the target of 2% is just as unavoidable as a temporary, slight undershooting’, he said. ‘That is not a problem, and we agreed on that in the strategy.’

The unanimous rejection by the Council of average inflation targeting was important for him, he noted.