The head of the Bundesbank called for a “step-by-step reduction in pandemic-linked bond purchases” from the European Central Bank, and warned that inflationary pressures were mounting in the eurozone.
Jens Weidmann said there are “upside risks” to inflation expectations and energy prices could be pushed higher than economists expect due to governments’ policies to combat climate change.
Weidmann said in a speech on Monday that the European Central Bank’s stimulus program to cushion the economic impact of the pandemic should end “as soon as the emergency is overcome”.
His statements sparked a clash with other members of the Central Bank’s board of directors over the future course of his policy. Policymakers will meet next month but are widely expected to hold off on announcing a decision until their September meeting.
“Inflation is not dead,” said Weidmann, one of the more conservative hawks on the ECB’s board. Compare inflation to the Galapagos giant tortoise, which has been wrongly classified as extinct for 100 years.
Eurozone inflation the flower to 2 percent 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 a slight decline in June. While the central bank predicted that price growth will fade next year, Weidmann stressed the need to “stay vigil”.
“In my estimation, the risks surrounding the price outlook have changed,” he said, warning of “upside risks to price developments that pervade the eurozone.”
He said that inflation will continue to rise next year if oil prices do not fall as widely expected, adding: “In addition, politicians can take additional measures to protect the climate and thus increase energy prices.”
A German carbon tax helped lift inflation in Europe’s largest economy to 2.4 percent in May, the highest level in more than two years. Inflation could reach 4 percent in Germany later this year, Weidmann said, adding: “This reduces the purchasing power of private households.”
“Thanks to the progress of vaccination, the eurozone economy is now on its way out of the crisis,” said the head of the Bundesbank, adding that this “has implications” for the European Central Bank’s Epidemic Emergency Purchase Program (PEPP), its main crisis – combat policy.
The European Central Bank stepped up the pace of the PEPP program in March, leaving just over 700 billion euros of the total 1.85 trillion euros spent in the programme, which is set to run until at least March 2022.
Bond buying will stop when the European Central Bank decides the coronavirus crisis is over. Weidmann said the eurozone’s environmental protection plan should end when all “noteworthy” containment measures have been lifted and the economic recovery was “strong,” adding that the eurozone is expected to reach its pre-pandemic level by the first quarter of 2022.
“In order not to have to abruptly terminate PEPP, net purchases can be reduced step by step in advance,” he said.
His comments contradict those of Fabio Panetta, a member of the European Central Bank’s Executive Board, who said in Speech Monday: “It doesn’t look like we’re on track to run a hot economy.” “The recession in the economy is likely to remain significant for some time,” he warned.