ECB hardliner Weidmann comes in from the cold as deflation threatens

Thu Apr 17, 2014 7:57am EDT
 
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By Paul Carrel

FRANKFURT (Reuters) - As recently as last November, Jens Weidmann steadfastly opposed any move by the European Central Bank to print money to buy assets and buoy the euro zone economy. No longer.

The Bundesbank chief, known for his hardline stances at the ECB and as head of the German central bank, is now ready to support such quantitative easing (QE) if he and his ECB colleagues deem it necessary.

What has changed is that "the situation has changed", according to one person familiar with the German's thinking, speaking on condition of anonymity.

Euro zone inflation has slowed to 0.5 percent from 0.9 percent in November, falling far below the ECB's target of just under 2 percent and stoking fears the bloc could become stuck in a prolonged period of so-called "low-flation", or even sink into outright deflation.

Such a scenario risks undermining the efforts of crisis-hit countries on the euro zone periphery to shape up their economies, and could ultimately hit growth across the board if households defer purchases in anticipation of lower prices in the future.

Seeking to head off such a drop in inflation expectations, the ECB's governing council said earlier this month it was unanimous in its commitment to use unconventional tools - central bank-speak for things like QE - to counter a protracted period of low inflation.

The unanimity meant Weidmann was on board. This matters because as leader of the hawkish faction on the 24-member council, he can shape debates and restrict policy moves. Last May, for example, he prevailed in limiting the size of an interest rate cut.

At the height of the euro zone crisis in 2012, Weidmann was alone in opposing a new, as-yet-unused ECB bond-buy plan, dubbed Outright Monetary Transactions (OMT), that targets specific euro zone countries in trouble and comes with reform strings.   Continued...

 
File photo of Germany's federal reserve Bundesbank President Jens Weidmann posing for a photo beside the door of a giant safe at the money museum next to the Bundesbank headquarters in Frankfurt May 17, 2013. REUTERS/Kai Pfaffenbach/Files