ECB’s Weidmann: HICP to Accelerate Sustainably Next Few Years; Interest Rates to Rise

8 August 2021

By David Barwick – FRANKFURT (Econostream) – Euro area inflation will recover durably in the next few years, leading the European Central Bank to hike interest rates, ECB Governing Council member and German Bundesbank President Jens Weidmann said Sunday.

In an interview with German weekly Welt am Sonntag, Weidmann expressed doubts about the ECB’s inflation projections.

‘No one can say that reliably’, he said in objection to the assertion that interest rates would hardly change for the rest of the decade. ‘The pandemic has shown how quickly things can change unexpectedly. Personally, I expect that inflation will accelerate sustainably in the next few years and that we will then also see higher interest rates.’

Weidmann appeared to defend the ECB’s loose policy stance despite relatively high German inflation, noting that elsewhere in the Eurozone, ‘price pressures are currently much lower than here’ and that policy would be tightened were inflation prospects for the area as a whole to be ‘clearly beyond 2% in the future.’

However, he said, ‘[W]e need to carefully monitor whether price pressures actually weaken as expected in our forecasts. I also do not rule out higher inflation rates.’

Asked whether inflation in 2023 could be higher than the 1.4% currently forecast by the ECB, he diplomatically replied that uncertainty was ‘extraordinarily high at the moment.’

Price pressures were weak even before the pandemic, which remains a risk, he said, but bottlenecks in many sectors as well as pent-up demand could work in the other direction.

‘And if that translates into higher inflation expectations and wages, even a price surge that is initially temporary can continue and raise inflation in the medium term as well’, he said. ‘This is precisely why I argued in the Council not to lock in the very expansionary stance for too long.’

Weidmann was referring to the new forward guidance agreed by the Governing Council on July 22, which he and National Bank of Belgium Governor Pierre Wunsch were the only ones to oppose.

The rest of the Council wasn’t failing to perceive a threat, but rather weighting risks differently, he said. ECB President Christine Lagarde had said monetary policy would adapt to circumstances in any event, he added.

‘In any case, I will insist on keeping a close eye on the risk of an inflation rate that is too high and not only on the risk of an inflation rate that is too low’, he said.

Weidmann assured that the entire Governing Council would act as needed, undeterred by fiscal policy considerations.

The ECB’s new monetary policy strategy ‘still has to be filled with life over time’, he said. ‘And it is also normal that not everyone in the Governing Council always interprets the individual elements of the strategy in exactly the same way.’

The symmetry of the 2% target means deviations in either direction are equally undesirable, he said, which would help anchor expectations, reducing the need for reliance on unconventional policies. ‘The important thing is that we roll back these measures as soon as the situation normalises’, he said.

The pandemic emergency purchase programme (PEPP) has to end when the crisis ends, while the asset purchase programme (APP) will also be ended ‘as soon as the price outlook allows’, he said.

He dismissed the idea of an unorthodox sequence of tightening steps: ‘first we end the PEPP, then the APP is scaled back, and then we can raise interest rates’, he said.

As before, Weidmann said that German inflation at year-end could approach 5% ‘in the short term before falling again significantly.’