Bundesbank hawk signals backing for QE
One of the biggest barriers to the European Central Bank buying government bonds to save the eurozone from deflation was removed on Tuesday, after the head of Germany’s powerful Bundesbank offered his first sign of support for quantitative easing.
In a radical change of stance, Jens Weidmann, the Bundesbank president who is viewed as the ECB’s policy hawk, said a QE programme was not “generally out of the question”.
While he was clear he would prefer purchases of private-sector assets to government debt, he signalled he could back sovereign bond-buying if it conformed with EU law, which prohibits the financing of governments by its monetary authority.
“It should be clear that my assessment [of whether QE violates EU law] will be a strict one,” he told the financial news service Market News International. “Buying not just peripheral bonds but German and French ones as well does not automatically solve the problem of monetary financing.”
Neither Mr Weidmann nor the bulk of the ECB’s rate-setting governing council are likely to call for buying public or private-sector bonds just yet. But the Bundesbank chief’s remarks indicate ECB president Mario Draghi could push through QE without alienating the eurozone’s economic powerhouse – should the risk of a bout of Japanese-style deflation heighten.
Mr Weidmann had in the past objected to the ECB buying government bonds. He was the only policy maker to vote against its “outright monetary transactions” programme, through which it can buy potentially unlimited quantities of sovereign debt.
Now, with the ECB grappling with inflation of less than half its target of just below 2 per cent, the Bundesbank president appears to have softened his position. Ken Wattret, economist at BNP Paribas, said: “The comments sound somewhat more open-minded to the idea of additional policy action from the ECB, including unconventional measures, though with little sense of urgency.”
Low eurozone inflation has stoked calls for the central bank to buy government bonds and embark on other unconventional policy options, such as negative rates on deposits parked in its coffers. The ECB has so far parried the calls, opting to keep policy on hold earlier this month despite unveiling forecasts showing inflation would remain well below its target the year after next at 1.5 per cent.
Mr Weidmann made clear the current policy stance was “appropriate”. And even if the risk of a bout of falling prices rose substantially, he indicated the ECB would have to buy a host of assets, including not just the bonds of governments but also private-sector securities, to win his approval.
Officials in three of the ECB’s directorates – for market operations, legal and economics – are working on proposals for how the central bank could conduct QE and take other unconventional measures.