ECB’s Weidmann Says Government Finances Mustn’t Delay Tightening

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European Central Bank policy maker Jens Weidmann said officials must be prepared to tighten monetary policy when needed to curb inflation, even if that increases the strain on heavily indebted governments.

“We central bankers must clearly say that we will rein in monetary policy again when the price outlook demands it,” the Bundesbank president said in an interview with Berliner Zeitung published Friday. “And irrespective of whether the financing costs for governments rise.”

Weidman said the institution risks becoming too entangled with fiscal policy through its massive bond purchases, which have been deployed repeatedly to calm markets and to boost inflation, and which were ramped up during the pandemic.

“When the Eurosystem started its first purchase program 10 years ago, some were hoping that it would be temporary. This hasn’t become true,” he said. “My worry at the time that fiscal policy would increasingly smother monetary policy is still on my mind.”

The ECB has in recent weeks increased the pace of buying under its 1.85 trillion-euro ($2.23 trillion) pandemic purchase program to prevent higher borrowing costs spilling over from the U.S. to the weaker euro-zone economy. Weidmann has previously expressed concerns that such actions can weaken market discipline.

Isabel Schnabel, a German member of the ECB’s Executive Board, said last year she’s not worried about “fiscal dominance,” where central bankers would be under pressure to keep monetary policy loose regardless of accelerating inflation.

The debate is gaining ground as price pressures rise, fueled by pent-up demand, hoarded savings and extensive government spending. The ECB has said any jumps in inflation will be temporary, and Weidmann said he doesn’t currently foresee the increase in money supply leading to persistently elevated price gains.

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