— Bundesbank’s Weidmann refuses to rule out further ECB rate cuts
By Laurie Laird
LONDON (MaceNews) – A key European Central Bank official Thursday expressed support for symmetrical inflation targeting, and suggested that the Bank could cut rates further into negative territory to lift stubbornly-low Eurozone inflation back to target.
A “make-up” strategy that allows prices to rise more rapidly following a period of below target inflation “could improve some stability goals,” said Bundesbank President Jens Weidmann at an online conference sponsored by Official Monetary and Financial Institutions Forum on Thursday. “An explicit” ECB commitment to a “symmetrical” inflation target “would be clearer and easier to understand,” he said.
Currently the ECB aims to keep inflation at a level of close to but less than 2%, but has failed to consistently hit that target over the past decade. The ECB has suffered deflation over the past three months.
ECB President Christine Lagarde has spoken of the merits of such a measure, following the Federal Reserve’s shift to more flexible inflation targeting in August. UK Economic Charles Goodhart, a former member of the Bank of England’s Monetary Policy Committee challenged Weidmann at the online event, claiming a financial crisis is “the worst possible time” to introduce new structural parameters and calling Fed’s decision “probably wrong,”
The ECB has resumed a strategy review, suspended over the spring during the first Covid-related lockdown, an exercise long overdue, even before the economic downturn, said Weidmann. As the president of the Bundesbank, Weidmann serves on the ECB’s Governing Council. Under the Bank’s rotating voting schedule, Weidmann did not weigh in on the October rate-setting meeting but will vote on policy in December.
Weidmann refused to rule out monetary easing at the upcoming meeting, noting that there are “reasons for monetary policy to be expansionary.” The Governing Council will be working with updated economic forecasts in December, he added.
He also raised speculation of another reduction in the ECB’s marginal lending rate from the current level of -0.5%. “We haven’t reached the reversal rate yet. Interest rate decreases can still have the intended effect,” he said. However Weidmann noted that his comments repeated an already-public ECB stance and weren’t necessarily his “personal view.”
Considered one of the more hawkish members of the Governing Council, Weidmann urged heavily-indebted eurozone countries to climb back to a “virtuous path” with regard to public finances. While conceding that “fiscal policy should take the lead” in countering Covid-related slowdowns, he noted that post-crisis fiscal consolation in some member states has “not been too reassuring.”
Weidmann also warned the the flexibility of the ECB’s pandemic asset purchase programme (PEPP), which permits the Bank to load up on bond purchases from nations suffering an increase in borrowing rates, must not be open ended. “The PEPP was designed to cope with the challenges of the crisis … eventually, we are bound to return to the capital key” which allocates ECB purchases in line with size of member states’ economies.
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Contact this reporter: laurie@macenews.com.
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