Bundesbank Weidmann Does not See Sustained Deflation Pressures

The European Central Bank should be flexible about the time it takes to lift inflation back to target and should worry about low bank profits as they could reduce the effectiveness of its policies, Governing Council member Jens Weidmann said.

Struggling with ultra low inflation for years, the ECB has debated how quickly it needs to raise inflation to its objective of almost 2 percent and whether the definition of “medium term” could reach beyond its 2018 forecasts horizon.

“Medium term is not ‘sometime in the distant future,’ but it is also not ‘as soon as possible and at any price’, Weidmann, also the head of Germany’s Bundesbank, said on Wednesday. “Medium term thus deliberately contains some ambiguity regarding the exact time horizon.”

The ECB does not currently expect inflation to rise back to target through 2018.

Weidmann, one of the ECB’s top hawks, also argued that even with inflation dipping into negative territory recently, he does not see the risk of sustained deflation, or fall in prices.

He was also not convinced that the drop in core inflation, which strips out volatile components such as food and energy prices, would continue.

The ECB cut rates and expanded its asset purchase programme earlier this month to boost inflation in a move opposed by Weidmann, who argued that government bond buys should be an emergency tool and warned that banking profits would suffer.

“We as central bankers are not so much concerned about banking profits but about banks’ ability to transmit monetary policy,” Weidmann said in a speech in Lichtenstein. “And this ability to transmit policy is not independent of their capital base, because that largely determines how well banks can absorb shocks.”

Weidmann also warned that ultra low rates could lead to asset bubbles and also reduced governments’ willingness to carry out structural reforms, a precondition to faster growth and a revival of inflation.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza