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The head of the German central bank predicted that inflation in the country would reach more than 3% this year and warned that monetary policy will have to be tightened “if the price outlook demands it”.
Jens Weidmann, President of the Bundesbank, said that if monetary policy is kept “very expansionary” to deal with the fallout from the pandemic, “when inflation rates rise in the euro area, we will discuss the issue again. fundamental orientation of monetary policy ”.
In an interview with Augsburger Allgemeine published on Friday, the Bundesbank chief also backed calls for Germany to revert to its strict restrictions on budget deficits next year and warned that once the pandemic ended, countries should reduce their inflated debts.
Weidmann is one of the more conservative “hawks” on the board of governors of the European Central Bank. His latest comments provide an early sign that hawks among ECB policymakers are focused on the need to tighten monetary policy once the pandemic is over, after months of mostly backing its ultra-cowardly policies to combat the crisis.
Conservative commentators in Germany have long feared excessive inflation and fear 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, falling from minus 0.7% in December to 1.6%, according to an estimate released last month.
The jump – after five months in negative territory – was fueled by a combination of one-off factors, including a reversal of the temporary German value-added tax cut, a new carbon tax and a reweighting of the basket of products used to calculate the prices. .
Weidmann said he expected headline consumer price inflation in the country to exceed 3 percent by the end of the year. Although he said it would only be “temporary” due to one-off effects, he added: “One thing is clear: the inflation rate will not stay as low as last year in the long run. . “
“Monetary policy will tighten the reins if the price outlook demands it,” he said. “For now, however, the goal is to combat the consequences of the pandemic.”
Weidmann, former economic adviser to Chancellor Angela Merkel, also embarked on the debate on whether to reform Germany’s constitutional debt brake. The rule limits the budget deficit to just 0.35% of gross domestic product, but was suspended last year to allow for increased 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 in reducing 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 the € 50 billion in reserves it has built up in recent years. “The renewed exceptions should only be discussed if the pandemic lasts longer,” he added.
Germany’s debt rose from nearly 60% of gross domestic product to 70% last year, IMF says, while aggregate euro area public debt rose from 84% of GDP to almost 100% .
Weidmann called on countries to put their public finances 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 funding costs low,” he said.
After eurozone inflation hit an 11-month high of 0.9% in January, other ECB policymakers, including its president Christine Lagarde, have stressed that it will likely stay below its target by 2% for several years. “It’s going to be a while before we worry about inflation,” Lagarde said during an online event this week.
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