Bundesbank boss calls on ECB to scale back bond purchases

The head of Germany’s central bank has called for the European Central Bank’s pandemic-related bond purchases to be “reduced step-by-step” and warned that inflationary pressures are mounting in the euro zone.

Jens Weidmann said there were "upside risks" to the outlook for inflation and energy prices could be pushed higher than economists expect by governments' policies to fight climate change.

The ECB’s stimulus programme to ease the economic impact of the pandemic should end “as soon as the emergency situation has been overcome”, Weidmann said in a speech on Monday.

His remarks set up a clash with other members of the central bank’s governing council about the future path of its policy. Policymakers will meet next month but they are widely expected to hold off on announcing a decision until their September meeting.

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Inflation

“Inflation is not dead,” said Mr Weidmann, one of the more conservative hawks on the ECB governing council. He compared inflation to the Galápagos giant tortoise, which was wrongly classed as extinct for 100 years.

Euro zone inflation rose to 2 per cent in May, the first time the rate had surpassed the ECB’s target in more than two years, although economists expect that new data on Wednesday will show it dipped slightly in June. While the central bank has predicted price growth will fade next year, Mr Weidmann stressed the need to “remain vigilant”.

“In my estimation, the risks around the price outlook have shifted,” he said, warning of “upside risks to price developments being predominant in the euro area”.

Inflation will continue to rise next year if oil prices do not drop back as is widely expected, he said, adding: “In addition, politicians could take additional climate protection measures and thus increase energy prices.”

A German carbon tax helped to lift inflation in Europe’s largest economy to 2.4 per cent in May, its highest in more than two years. Weidmann said inflation could hit 4 per cent in Germany later this year, adding: “This reduces the purchasing power of private households.”

“Thanks to the vaccination progress, the economy in the euro area is now on the way out of the crisis,” said the Bundesbank boss, adding that this “has implications” for the ECB’s pandemic emergency purchase programme (PEPP), its flagship crisis-fighting policy.

Crisis

The ECB stepped up the pace of PEPP in March and it has just over €700 billion of the overall €1.85tn left to spend in the programme, which is due to last until at least March 2022.

Bond-buying will stop when the ECB judges the coronavirus crisis is over. Weidmann said the PEPP should end when all “noteworthy” containment measures had been lifted and the economic recovery was “solid”, adding that the euro zone was expected to reach its pre-pandemic level of output by the first quarter of 2022.

“In order not to have to end the PEPP suddenly, however, the net purchases could be reduced step-by-step in advance,” he said.

His comments contrasted with those of Fabio Panetta, an ECB executive board member, who said in a speech on Monday: “We do not seem to be on track to run the economy hot.” He warned that “slack in the economy is likely to remain large for some time”. – Copyright The Financial Times Limited 2021