ECB must tighten policy if needed to counter inflation, Weidmann says

BERLIN (Reuters) – The European Central Bank must tighten monetary policy if it needs to counter inflationary pressures and cannot be put off from doing so by the financing costs of euro zone states, ECB policymaker Jens Weidmann told the Welt am Sonntag newspaper.

Euro zone countries have ramped up their borrowing to cope with the coronavirus pandemic, potentially leaving them exposed to increased debt servicing costs if the central bank tightens policy to counter upward pressure on prices.

“The ECB is not there to take care of the solvency protection of the states,” said Weidmann, whose role as president of Germany’s Bundesbank gives him a seat on the ECB’s policymaking Governing Council.

Should the inflation outlook rise sustainably, the ECB would have to act in line with its price stability objective, Weidmann said. “We have to make it clear again and again that we will tighten monetary policy if the price outlook calls for it.

“We cannot then take into account the financing costs of the states,” he added.

After its July 22 policy meeting, the ECB pledged to keep interest rates at record lows for even longer to boost sluggish inflation, and warned that the rapidly spreading Delta variant of the coronavirus posed a risk to the euro zone’s recovery.

“I do not rule out higher inflation rates,” the paper quoted Weidmann as saying. “In any case, I will insist on keeping a close eye on the risk of an excessively high inflation rate and not only on the risk of an excessively low inflation rate.”

The euro zone economy grew faster than expected in the second quarter, pulling out of a pandemic-induced recession, while the easing of coronavirus curbs also helped inflation shoot past the ECB’s 2% target in July, hitting 2.2%.

When the ECB decides it is time to tighten policy, Weidmann expected the central bank would first end its PEPP emergency bond purchase programme before scaling back its APP purchase plan.

“The sequence would then be: first we end the PEPP, then the APP is scaled back, and then we can raise interest rates,” he said.

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