Weber Sees Subdued Inflation, ‘Protracted’ Recovery
European Central Bank council member Axel Weber said price pressures will remain subdued as the euro- region economy struggles to recover from its worst recession since World War II.
There is little risk that the ECB’s policy of flooding banks with cash will stoke inflation and it will take some time before the economy is growing fast enough to push up prices, Weber said in a speech in Frankfurt today. “All in all, inflation fears, understandable as they may be, are unfounded.”
The ECB last week left its benchmark interest rate at a record low of 1 percent and said it will continue to lend banks as much money as they want at that rate for up to 12 months. It remains wary of nipping the euro-region recovery in the bud by tightening policy too soon as rising unemployment and the expiry of government rescue packages threaten to damp expansion next year.
Weber, who heads Germany’s Bundesbank, said the economic recovery will be “protracted” and interest rates are “appropriate” for the inflation outlook. “It’s too early” to withdraw the monetary stimulus, he said, adding a “timely exit” is nevertheless vital.
ECB President Jean-Claude Trichet said last week that, when the time comes, many of the bank’s stimulus measures will “naturally unwind” as existing loans mature and demand for additional cash wanes paydayloans. The ECB can also use fine-tuning operations to absorb excess liquidity if needed, he added.
Long-Term Loans
Weber said lending should be scaled back “gradually,” and while the ECB will probably reduce the number of its long-term refinancing operations, it’s unlikely to reduce them to pre- crisis levels.
Weber said the timing of the ECB’s exit should be guided by signals from money-supply and credit data, which he said are currently not pointing to any inflation risks.
“As soon as upside risks to price stability in the medium term become visible, it is time to make monetary policy more restrictive,” he said.
Weber also restated his view that it might be wise to tighten policy before any threats to price stability emerge in order to prevent future crises. That could present policy makers with a communications challenge, particularly if unemployment is rising at the time, he said.