The head of Germany’s central bank has forecast that inflation in the country will surge to more than 3 per cent this year and warned that monetary policy will need to be tightened “if the price outlook requires it”.
Jens Weidmann, president of the Bundesbank, said that while monetary policy was being kept “very expansionary” to tackle the fallout from the pandemic, “when inflation rates rise in the euro area, we will again discuss the fundamental direction of monetary policy”.
In an interview with Augsburger Allgemeine published on Friday, the Bundesbank head also supported calls for Germany to return to its strict curbs on budget deficits next year and warned that once the pandemic ended, countries would need to cut their inflated debt piles.
Weidmann is one of the most conservative “hawks” on the European Central Bank’s governing council. His latest comments provide an early sign that the hawks among ECB policymakers are focusing on the need to tighten monetary policy once the pandemic ends, after months of being mostly supportive of its ultra-loose policies to tackle the crisis.
Conservative commentators in Germany have long feared excessive inflation and worry that the ECB’s loose monetary policy could cause the economy to overheat. German inflation rose faster than the rest of the eurozone in January, climbing from minus 0.7 per cent in December to 1.6 per cent, according to an estimate published last month.
The jump — after five months in negative territory — was fuelled by a combination of one-off factors, including a reversal of the temporary cut in German value added tax, a new carbon tax and a reweighting of the basket of products used to calculate prices.
Weidmann said he expected headline consumer price inflation in the country to exceed 3 per cent by the end of the year. Although he said this would “only be temporary” due to one-off effects, he added: “One thing is clear: the inflation rate will not remain as low as last year over the long term.”
“Monetary policy will tighten the reins if the price outlook requires it,” he said. “At the moment, however, the aim is to combat the consequences of the pandemic.”
Weidmann, a former economic adviser to chancellor Angela Merkel, also waded into the debate on whether to reform Germany’s constitutional debt brake. The rule limits the budget deficit to only 0.35 per cent of gross domestic product but was suspended last year to allow for a surge in public spending in response to the pandemic.
“Germany has done well with the debt brake,” he said, adding: “The debt ratio is much lower than it was after the financial crisis. But yes, effective fiscal rules like the debt brake are important to reduce this debt burden after the crisis.”
The Bundesbank president said it was realistic for Germany to respect the debt brake again next year, thanks to €50bn of reserves it has built up in recent years. “Renewed exceptions will only have to be discussed if the pandemic lasts longer,” he added.
Germany’s debt rose from almost 60 per cent of gross domestic product to 70 per cent last year, according to the IMF, while overall eurozone government debt rose from 84 per cent of GDP to almost 100 per cent.
Weidmann called on countries to put their public finances back in order after the crisis. “A high level of debt makes the monetary union vulnerable and could then put pressure on monetary policy to keep financing costs low,” he said.
After eurozone inflation shot up to an 11-month high of 0.9 per cent in January, other ECB policymakers including its president Christine Lagarde have stressed it is likely to remain below its 2 per cent target for several years. “It is going to be a while before we are worrying about inflation,” Lagarde told an online event this week.