The head of the German central bank called for the acquisition of bonds linked to the European Central Bank’s pandemic to be “gradually reduced” and warned that inflationary pressures would increase in the euro area.
Jens Weidmann said there are “risks to each other” for the inflation outlook and that energy prices may be pushed higher than economists expect from governments ’policies to combat ‘to climate change.
The ECB’s stimulus program to alleviate the economic impact of the pandemic should end “as soon as the emergency situation is overcome,” Weidmann said in a speech Monday.
His statements created a rally with other members of the central bank’s governing council over the future course of his policy. Policy makers will meet next month, but are widely expected to announce a decision until their September meeting.
“Inflation is not dead,” said Weidmann, one of the most conservative hawks on the ECB’s governing council. He compared inflation to the Galapagos giant tortoise, which has been erroneously classified as extinct for 100 years.
Eurozone inflation pink at 2 per cent in May, the first time the rate has exceeded the ECB’s target in more than two years, although economists expect new data on Wednesday to show that it fell slightly in June. While the central bank predicted that price growth would fade next year, Weidmann stressed the need to “stay vigilant”.
“In my estimation, the risks surrounding the price outlook have changed,” he said, warning of “risks to each other due to the evolution of prices that are predominant in the euro area”.
Inflation will continue to rise next year if oil prices do not fall as widely predicted, he said, “adding:” In addition, policymakers may take additional climate protection measures and thus raise prices. of energy “.
A German coal tax has helped raise inflation in Europe’s largest economy to 2.4 percent in May, the highest in more than two years. Weidmann said inflation could hit 4 percent in Germany later this year, adding: “This reduces the purchasing power of private households.”
“Thanks to the progress of vaccination, the economy in the euro area is now on track to emerge from the crisis,” said the head of the Bundesbank, adding that this “has implications” for the emergency purchase program. pandemic (PEPP) of the ECB, its crisis of cutting-edge policy.
The ECB has intensified the pace of the March PEPP and has just over € 700 billion of the € 1.85 billion overall to spend on the program, which should last until at least March 2022.
The acquisition of bonds will stop when the ECB judges the coronavirus crisis is over. Weidmann said the PEPP should have ended when all “noteworthy” containment measures had been lifted and the economic recovery was “solid,” adding that the eurozone was projected to reach its pre-pandemic level of production by the first quarter of 2022.
“By not having to finish the PEPP suddenly, however, net purchases could be reduced step by step in advance,” he said.
His comments contrast with those of Fabio Panetta, a member of the ECB’s executive council, who said in a speech Monday: “We don’t seem to be on track to grow the economy hot.” He warned that “the slack in the economy is likely to remain large for some time.”