There is growing friction within the European Central Bank (ECB) over whether to continue adopting stimulus measures linked to the Coronavirus.
It was reported on the 28th (local time) that the ECB would reduce its bond purchases as a result of COVID-19 as the European economy recovers, but some officials disagree.
Jens Weidmann, the president of the German Bundesbank, said in an interview with the German business magazine Handelsblatt the same day that bond purchases should be phased out and inflationary pressures are building in the eurozone (19 countries using the euro).
ECB stimulus measures should cease “as soon as the emergency is over,” he said, noting that the climate change measures taken by European governments are likely to lead to higher inflation and energy prices.
Until at least March next year, the ECB plans to implement a €1.85 trillion emergency pandemic purchasing program.
According to Mr. Weidman, if the ECB believes the COVID-19 crisis is over, it is desirable to “proceed with the reduction of the EPPP in stages” until the EPPP is entirely eliminated. Since various restrictions on COVID-related activities have been lifted and the economic recovery has been smooth, he said he expects pre-pandemic levels to be restored in the first quarter of next year.
Inflation in Germany could reach 4 percent in the second half of this year, Weidman said. He added “inflation is not dead.”
In May, eurozone inflation rose by 2 percent, exceeding the ECB’s target for the first time in more than two years. The ECB expects inflation to slow next year, but Weitmann warns against complacency.
Energy prices are also on the rise. In May, Germany raised its carbon tax to 2.4 percent as a measure to combat climate change, and inflation will erode household purchasing power, Weidmann said.
Robert Holzmann, the governor of Austria’s central bank, said of the PEPP, “I am not sure, but I think it will end in March.”
As some European central bank governors begin to call for a reduction in quantitative easing, ECB chief Fabio Panetta said that emergency bond purchases of €1.85 trillion should be considered before the end of next year. In his opinion, there should be no suspension of the stimulus package.
Mr. Panetta stated, “The European economy is still not very hot yet.” He suggested that interest rates should be left low until the government increases inflation through increased spending.
An early reduction in quantitative easing would also cause interest rates to rise sharply and eventually force a resumption of bond purchases.
According to Panetta, QE policy proved beneficial during the pandemic and should be continued, setting off a confrontation between Bundesbank President Weidmann and ECB chief Isabel Schnabel.