ECB Brief: Weidmann: PEPP Flexibility Should Remain Reserved for Special Situations

24 November 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Jens Weidmann on Wednesday spoke out strongly about inflation risks and in support of the timely withdrawal of monetary accommodation.

In a speech at a regional branch of the German Bundesbank, which he heads, Weidmann:

  • Warned against making the emergency mode of monetary policy permanent, saying that those measures linked specifically to the pandemic ‘must be terminated as soon as the emergency situation has been overcome’, including the flexibility of the pandemic emergency purchase programme (PEPP), which ‘should be reserved for extraordinary situations.’
  • Advocated ‘not locking in the very loose stance of monetary policy for too long.’
  • Objected to the view that monetary accommodation for longer than needed was the lesser evil, as the possible resulting necessity of hiking abruptly could cause financial stability problems that also needed to be considered.
  • Urged central banks not to ‘allow themselves to be distracted by external pressure’ from economic actors, including governments, whose financing costs were affected by monetary policy.
  • Said that ‘current price increases are significantly reducing purchasing power’.
  • Predicted that German inflation would peak in the current month at almost 6% and then decline, but that it would not fall below 3% until the end of 2022.
  • Suggested that analyses and models stemming from an environment of low inflation could have currently low informational value.
  • Agreed that there were downside inflation risks in Germany and the euro area, but maintained that ‘the upside risks clearly outweigh the downside risks, recently even more so.’
  • Identified as upside risks pent-up consumption, the persistence of supply bottlenecks and associated price pressures, and a pick-up of inflation expectations or wage growth rates.
  • Observed that there was presently ‘no evidence of a significant rise in broad-based wage pressures in Germany’, but that ‘companies' complaints about labour shortages have increased considerably - especially in this country, but also among our European neighbours’, setting the stage for higher wage demands.
  • Cautioned that short-term inflation expectations had ‘already risen considerably’ on the part not just of German households and firms, but also of experts and financial market participants with respect to the euro area.
  • Noted that financial experts’ long-term expectations were also up ‘slightly’.
  • Said: ‘All in all, however, it could well be that the inflation rate in the euro area will not fall below 2 per cent again in the medium term. Therefore, monetary policy should not look one-sidedly at the risk of an inflation rate that is too low, but should also pay attention to the risk of an inflation rate that is stubbornly too high.’
  • Repeated last Bundesbank monthly report on the possibility that German growth would tread water in 4Q, so that output would not reach pre-pandemic levels. ‘And on average for the year 2021, economic growth in Germany is likely to be significantly lower than estimated in our June forecast’, he added.
  • Inferred from full order books that the strong recovery was ‘probably only postponed.’