German minister backs central bank on inflation

 

WOLFGANG SCHÄUBLE, German finance minister, has given vital political cover to the Bundesbank, speaking out in support of the idea that Germany could tolerate a rate of inflation above the euro zone average.

Making a rare exception to the rule that Berlin does not comment on central bank policy, Mr Schäuble declared that price rises “in a corridor between 2 and 3 per cent” would be “tolerable” in Germany – slightly above the European Central Bank’s target of keeping inflation across the region at close to but below 2 per cent.

His statement followed comments before a parliamentary committee on Wednesday by a Bundesbank official, who cautioned that the euro zone’s largest economy might face “an inflation rate somewhat above average” as countries such as Greece and Portugal squeezed prices and wages to regain competitiveness.

Mr Schäuble’s comments seemed to be aimed at helping prepare an inflation-averse public for higher price rises to counter the deflationary effects of restructuring policies on the euro zone’s periphery.

The hyperinflation of the 1920s is considered the root of Germany’s aversion to inflation – and also led to the founding of the independent Bundesbank after the second World War.

Germany has traditionally pushed for tighter monetary policy to deal with domestic price pressures.

German inflation is running at about 2 per cent, while that of the euro zone is at 2.6 per cent. However, Bundesbank president Jens Weidmann appears to recognise that the euro zone is in such a precarious state that now is not the time to call for a rise in lending rates. Despite a willingness to contemplate inflation above the euro zone average, Mr Weidmann does not envisage a big divergence.

A person close to Mr Weidmann said: “Given Germany’s contribution to the , a 4 per cent inflation rate in Germany would be hard to reconcile with price stability in the euro area as a whole.”

That could lead to expectations of rising inflation, the person added, which would “mean something was wrong with” the European Central Banks’s policy.

– Copyright The Financial Times Limited 2012