Weidmann Remains Upbeat on Economy as Inflation Risks Rise

Are the BOJ and ECB Using ‘Pea Shooters’ Versus the Fed?
  • Bundesbank profit rose to EU3.2b in 2015 from EU3.0b in 2014
  • Migration can increase growth potential by 0.25%: Bundesbank

There are grounds to be positive about the economic outlook for Germany and the euro area even as the inflation outlook worsens, European Central Bank Governing Council member Jens Weidmann said.

“All things considered, the economic outlook for the euro area is thus not as bad as it is sometimes made out to be,” Weidmann, who heads Germany’s Bundesbank, said in a statement at the release of the institution’s annual report in Frankfurt on Wednesday. That’s even though “downside risks to euro-area price developments have recently risen,” he said.

The Bundesbank said in the report that profit for 2015 rose to 3.2 billion euros ($3.5 billion) from 3 billion euros the previous year, as net income from financial operations rose as net interest income declined to a record low. It “tentatively” lowered its risk provisions to 13.6 billion euros as holdings of euro-area securities purchased during the sovereign debt crisis diminished. The profit was transferred in full to the federal government, the Bundesbank said.

The ECB is set to review and possibly expand its monetary stimulus at its March 10 policy meeting. Referring to the debate in Germany over the use of cash and the impact of possibly more-negative interest rates, Weidmann said that curtailing the use of paper currency to discourage hoarding was the “wrong way” to respond to monetary policy challenges.

Exotic Measures

“There is no disputing the possibility of evasive action in the holding of cash if interest rates fall too far below zero,” he said. “Instead of focusing on financial repression, we should be discussing how to return to higher interest rates through increased growth.”

At a press conference, the Bundesbank president also cautioned against deploying “exotic” monetary-policy measures or doing away with the limitations in-built in the ECB’s quantitative-easing program to respond to the bank-led equity rout of the past weeks.

“We must not look too closely at short-term market expectations,” he said responding to journalists’ questions. “We must look at the net effect of stimulus versus its side effects.”

Weidmann said that it would be “dangerous to simply ignore” the long-term risks and side-effects of the ECB’s accommodative monetary policy.

Refugee Impact

The Bundesbank president also said that Germany’s economy remains “in good shape,” with stimulus coming from low energy prices as well as from higher spending in response to the refugee crisis.

“The migration of refugees to Germany will cause potential growth as measured by potential output to rise by just over 0.25 percent in 2016 and 2017,” the Bundesbank said in the report. “Success in integrating refugees into society and, in particular, the longer-run economic impact of immigration will hinge in large measure on how quickly and smoothly these immigrants can be absorbed by the labor market.”

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