ADVERTISEMENT

ECB Shouldn’t Disregard Risk of Higher Inflation, Weidmann Says

We have to watch the risks to the outlook for prices. In my view, upside risks predominate, the German central bank chief said.

ECB Shouldn’t Disregard Risk of Higher Inflation, Weidmann Says
Jens Weidmann, president of the Deutsche Bundesbank. (Photographer: Alex Kraus/Bloomberg)

Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Bundesbank President Jens Weidmann said European Central Bank officials shouldn’t disregard the risk that inflation could accelerate faster than currently anticipated, adding his voice to an intensifying debate ahead of the institution’s policy meeting next week. 

“We have to watch the risks to the outlook for prices. In my view, upside risks predominate,” the German central bank chief told a conference on Wednesday, according to a copy of his speech. “Accommodative monetary remains appropriate. But we shouldn’t disregard the risk to too-fast inflation.”

His comments come after euro-area inflation climbed to a decade-high of 3% in August, testing policy makers’ insistence that the spike is due to temporary factors that should fade next year.

Weidmann cited supply-chain bottlenecks that are raising costs for manufacturers and the large amount of household savings as possible sources of higher prices. If these factors lead to higher inflation expectations and an increase in wages, inflation could accelerate on a more durable basis, he said. 

The ECB meets next week to discuss new economic projections and decide how much bonds it will buy in the fourth quarter under its 1.85 trillion-euro ($2.19 trillion) emergency program. Austrian policy maker Robert Holzmann and his Dutch colleague Klaas Knot argued on Tuesday that purchases should be reduced given how far the euro area’s recovery has advanced. 

Yannis Stournaras, the Bank of Greece governor, countered on Wednesday that the ECB shouldn’t over-interpret the spike in inflation, signaling a potentially heated debate between hawkish-leaning members of the Governing Council and those who are urging more caution. 

Echoing Knot, Weidmann argued that the flexibility of the central bank’s pandemic purchases should only be used in extraordinary circumstances. He also said buying should be scaled back gradually to avoid a sudden stop when the program comes to an end.

©2021 Bloomberg L.P.