Monday, 4 July 2016

Bundesbank President Opposes Post-Brexit European Stimulus

In World Economy News 04/07/2016

Bundesbank President Jens Weidmann signaled that he would oppose any fresh stimulus action from the European Central Bank in response to Britain’s historic vote to exit the European Union, dealing a blow to hopes that the ECB will soon expand its bond purchases or cut interest rates again.
In a speech in Munich, Mr. Weidmann said the ECB’s policy mix was already “very expansionary” and questioned whether fresh stimulus would have any positive effect.
“I don’t see the need for further loosening of monetary policy in response to the Brexit vote,” Mr. Weidmann said.
The U.K. vote sent shocks through financial markets last week, putting pressure on European currencies and stocks, in particular the region’s banks. Central banks responded to the vote with pledges to provide cash to banks and deploy all the tools in their arsenals to maintain stable prices and safeguard the financial system.
Bank of England governor Mark Carney went further on Thursday, signaling that the bank is likely to unleash fresh stimulus measures over the summer. Analysts have suggested that the ECB could follow suit as soon as September, by cutting interest rates further below zero or expanding its EUR1.8 trillion bond-purchase program again.
Mr. Weidmann’s comments make that more unlikely. The Bundesbank has an influential voice within the ECB because Germany accounts for more than a quarter of the region’s economy.
Still, Germany’s central bank has been repeatedly overruled in recent years as the ECB launched and expanded its bond-purchase program–a program that the Bundesbank publicly opposed from the outset.
Mr. Weidmann said the result of the U.K. referendum was “very regrettable,” and “a mistake in my view.” But while he conceded that the result could slightly reduce growth in the euro area and Germany, he said fresh ECB stimulus wouldn’t remove the political uncertainty created by the vote.
The response in financial markets, he said, has so far been orderly, with no signs of panic. Still, he said it wasn’t yet clear how severe the economic fallout would be, and that financial markets may not have reached an equilibrium level.
“A long phase of heightened uncertainty is very possible,” Mr. Weidmann warned.
To keep that phase as short as possible, U.K. and EU officials should discuss their future relationship quickly and reasonably, he said. EU officials shouldn’t make an example of Britain, but nor should the U.K. be given preferential treatment compared with other non-EU countries such as Norway and Switzerland, he said.
Mr. Weidmann also expressed hope that Frankfurt could benefit by luring financial-services businesses from London–a development that he urged policy makers in Germany to support.
“We should welcome those who relocate their business from London to Frankfurt,” Mr. Weidmann said.

Source: Dow Jones