(Bloomberg) -- German savers critical of the European Central Bank's ultra-loose monetary stance have received some words of reassurance from the head of their own monetary institution.
Normalization will “hopefully happen, and that's something we're working on and discussing,” Bundesbank President Jens Weidmann told a public audience between live music and beer booths at the institution's Frankfurt headquarters on Saturday. “We are coming out of the worst economic crisis in post-war history, and therefore expansive monetary policy is appropriate. We just shouldn't hold onto this policy for longer than necessary.”
As the ECB tries to judge how the euro-area economy would fare if monetary stimulus is pared back, Germany remains one of the biggest critics of the 2.3 trillion-euro ($2.6 trillion) bond-buying program and negative interest rates. Weidmann, at the helm of the nation's central bank since 2011, spent the open-house event fielding questions ranging from why rates are still so low to imbalances in the euro area's payments system.
“I can certainly understand the frustration a lot of people have who want to save their money,” he responded. “On the other hand, one has to acknowledge that it's not such an extraordinary situation -- real interest rates, after subtracting the inflation rate, are currently negative. But that's no historical novelty.”
A key challenge facing the ECB, according to Weidmann, is that normalizing ultra-loose monetary policy might pose difficulties in countries that didn't use the period of low borrowing costs to restructure their finances and push through economic reforms. Stimulus shouldn't be kept ultra loose for longer than is necessary in order to accommodate these member states, he said.
Looking Through
It's also important that officials look through temporary effects on price growth in order to determine whether their goal has been reached, he said. With the economic recovery in the euro area appearing to solidify, policy makers will need to decide how much of the acceleration in inflation is demand-driven, and how much is being driven by factors like energy prices.
“The discussion isn't so easy,” Weidmann said, acknowledging the economy's robust growth but adding that the primary mandate is inflation, which remains lackluster. “We are in complete agreement within the ECB Governing Council that expansive monetary policy remains appropriate and it's clear we won't completely throw on the brakes. What we do discuss -- and controversially so -- is how expansive it should be.”
The open house, the second since 2014, is also being used to help mark the 60th anniversary of the Bundesbank. Some of the several dozen audience members during the one-hour dialog applauded the initiative, and one middle-aged man suggested that the ECB should do the same in order to build trust.
Weidmann answered one question about whether having the ECB even made sense, considering the heterogeneity of the euro area, by invoking the memory of former German chancellor Helmut Kohl, who died in June.
Locomotive Theory
“Later today I'm going to Helmut Kohl's funeral, which is why I need to leave punctually, and I say that because when the union was founded there was an intense political discussion about how a currency union works,” he said. “Helmut Kohl was certainly one of the people who stood for a so-called locomotive theory -- first we form the union and the rest will come. The Bundesbank leaned more toward the coronation theory that a currency union needs a certain degree of convergence.”
Some members of the audience indicated they may want to take monetary policy matters into their own hands. An 11-year old boy, who didn't give his name, asked Weidmann how to apply to become Bundesbank president. The policy maker was quick to offer him some helpful advice.
“You've still got some time to prepare for this,” he said. “One should certainly have a few professional qualifications -- I would suggest that you study economics. That might help.”
To contact the reporter on this story: Carolynn Look in Frankfurt at clook4@bloomberg.net.
To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Steve Geimann
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
