ECB’s Weidmann: Upside Inflation Risks Now Outweigh Downside Risks
1 September 2021
By David Barwick – FRANKFURT (Econostream) – Risks to inflation are tilted to the upside, European Central Bank Governing Council member Jens Weidmann said Wednesday.
In a speech at a symposium of the Bundesbank, which he heads, Weidmann reiterated that German inflation could head towards 5% around year’s end, but – as in the euro area overall – would ease next year.
‘However, we also have to pay attention to the risks in the price outlook’, he continued. ‘In my view, the upside risks currently outweigh the downside risks.’
Weidmann cited supply bottlenecks and potentially higher-than-expected private consumption as upside risks. ‘And if these temporary factors lead to higher inflation expectations and accelerated wage growth, the inflation rate may also rise noticeably in the longer term’, he said.
Were inflation expectations to converge towards the ECB’s price stability objective, this ‘would also be quite welcome’, he said.
As projected inflation remains clearly below the objective, ‘an expansionary monetary policy is still appropriate’, he said. ‘But we should not ignore the risk of too high inflation. In view of the existing uncertainty, we should not lock in the very loose monetary policy stance for too long.’
This, he said, was what he argued when the Governing Council discussed forward guidance in July. Weidmann and his Belgian counterpart, Pierre Wunsch, were the lone objectors to the revised forward guidance on interest rates decided then by the Council.
Weidmann urged avoiding an abrupt end to pandemic emergency purchase programme (PEPP) asset purchases via a gradual reduction ‘if the situation allows.’
Germany is in a ‘strong recovery’ thanks to policy intervention that had also ‘largely averted long-term damage, especially from the labour market’, he said. The pandemic’s impact on German production potential was only marginal, he said.
Echoing the Bundesbank’s latest monthly report, issued a week ago, Weidmann said third quarter output would top that of the second quarter, but that German economic growth for the full-year 2021 could undershoot the June forecast, which called for real, calendar-adjusted 2021 GDP growth of 3.7% (revised up from 3.0% last December).
Future developments were uncertain, owing to the pandemic, he said, warning of the possibility of new containment measures. ‘However, due to the progress made in vaccination, the economic impact will in all likelihood not be as severe as in previous waves of infection’, he added.