In World Economy News 09/02/2018
German Bundesbank President Jens Weidmann called on the European Central Bank Thursday to wind down its giant bond-buying program after September, urging officials not to be distracted by a stronger euro currency or volatility in global financial markets.
But the ECB’s chief economist struck a more cautious note, underlining a debate within the world’s number two central bank over how quickly to phase out its aggressive stimulus policies as the eurozone economy heats up.
Speaking at a conference here, Mr. Weidmann said “substantial net [asset] purchases beyond the announced amount do not seem to be required” if economic growth “progresses as currently expected.”
The ECB has pledged to buy EUR30 billion ($36.8 billion) a month of eurozone bonds at least through September under its EUR2.5 trillion quantitative easing program, and ECB President Mario Draghi has signaled that the program won’t end abruptly.
Mr. Weidmann didn’t rule out a short extension of QE after September. But he said the eurozone’s economic recovery might be more advanced than that in the U.S. when the Federal Reserve wound down its own QE program in 2014.
He urged policy makers not to be distracted by a rising euro or the situation in financial markets, which have gyrated wildly in recent days amid concerns about the reduction of monetary stimulus from central banks.
“U.S. equity prices rose over a prolonged period without any notable corrections, which was unusual given that valuations have been high overall, Mr. Weidmann said.
The ECB’s chief economist, Peter Praet, struck a more cautious tone at the same event, arguing that “there is still some way to go” before the ECB can change course.
“We want to make sure that the economy is on a sufficiently robust footing before there is a turn in policy,” Mr. Praet said.
In a separate question-and-answer session on Twitter, Mr. Praet said the ECB expects “strong economic growth,” and that the bank’s focus would “naturally” shift away from QE and toward possible interest-rate increases.
But asked about possible economic downturns in the U.S. and Europe, Mr. Praet said that “business cycles are well alive.” He sidestepped a question on the strength of the euro, saying ECB staff were currently calculating how the currency would affect the bank’s forecasts for growth and inflation. The euro has risen around 4% against the dollar since mid-December, to $1.22, and rose above $1.25 earlier this month.
And while Mr. Weidmann pointed to a pay settlement this week in Germany’s engineering sector as evidence that inflation is likely to pick up in Europe’s largest economy, Mr. Praet was more cautious.
Germany’s IG Metall labor union struck a pay deal on Tuesday with engineering-sector employers that could lead to wage raises for almost four million workers worth more than 3.5% a year in the next two years. That would mark a pickup from wage gains of around 2.5% in the past two years.
That pay deal is “fully in line with our baseline scenario for inflation, ” Mr. Praet said, suggesting it won’t affect how quickly the ECB withdraws its stimulus.
Source: Dow Jones
