ECB’s Weidmann: Inflation May Not Fall Below Target over Medium Term

19 November 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 the Frankfurt European Banking Congress, Weidmann, who heads the German Bundesbank, noted that with recently elevated inflation, ‘the issue of monetary policy normalisation has made a forceful return to the public debate.’

In line with the ECB’s new strategy, the key question is how long high inflation will last, he said. With supply constraints apt to ‘wear on for some time’ and energy prices unbroken, the answer, he suggested, was ‘longer than previously projected’.

Uncertainty also dominates in the medium term, he said, with expectations and wages potentially supporting developments. Thus, he said, ‘it could well be that inflation rates will not fall below our target over the medium term, as previously forecast.’

Weidmann warned against ignoring the risk of too-high inflation and committing to monetary accommodation for too long. The possibility of policy normalisation for the sake of price stability ‘should be crystal clear to everyone’, he said.

Such normalisation would lead to higher funding costs for sovereigns and reduce the government revenues derived from central bank profits, he said.

‘Against this background, central banks will come increasingly under pressure from governments and financial markets to keep monetary policy expansionary for longer than the rationale of price stability would call for’, he cautioned.

This underscores the need for ‘a path to sound public finances after the crisis’, based on ‘simpler and more transparent’ EU fiscal rules, he said.

Monetary policy is not there ‘to fix any solvency problems’, he said. ‘The Eurosystem was granted independence in order to achieve its primary objective of price stability. The more broadly we interpret our mandate, the more we run the risk of becoming entangled with politics and overburdening ourselves with too many tasks.’