Bundesbank President Jens Weidmann has warned that the European Central Bank (ECB) must not ignore the risk of inflation that is too high in the future.

"The most important question for monetary politicians today is: How persistent will the high price pressure be?" Said Weidmann at the "Frankfurt European Banking Congress".

From the Bundesbank's point of view, it will probably take longer than previously assumed for the high inflation rates to recede.

The supply bottlenecks in the wake of the corona pandemic could continue for a while.

Energy prices have also continued to rise recently.

Inflation may not fall as forecast

Christian Siedenbiedel

Editor in business.

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In addition, the price outlook is extremely uncertain, Weidmann emphasized. Higher inflation expectations and higher wage growth could increase price pressure in the medium term. The consequences of the pandemic could have a significant impact on the “inflationary environment”. “It could well be that in the medium term, the inflation rates will not fall below our inflation target of 2 percent, as previously forecast,” warned Weidmann.

"We shouldn't ignore the risk of excessive inflation and instead remain vigilant," warned the Bundesbank President.

In addition, given the considerable uncertainty about the inflation outlook, monetary policy should not hold on to its currently very expansionary course for too long.

"In order to anchor inflation expectations well, we have to emphasize again and again that if it is necessary to ensure price stability, monetary policy as a whole must be normalized." This should be clear to everyone, the financial markets as well as the governments, whose financing costs could rise.

Warning of fiscal dominance

Weidmann said higher financing costs would not be the only impact on public finances in the event of a tightening of monetary policy, emphasizing that public budgets in the euro zone are more dependent than before on changes in key interest rates due to the large-scale bond purchases by the central banks. "On the central bank accounts, the medium- and long-term bonds on the assets side contrast with short-term deposits from commercial banks on the liabilities side." A rising deposit rate will therefore reduce the profits of the central banks and lower government revenues through their lower profit distributions.

Against this background, the central banks would be increasingly put under pressure by the governments and the financial markets to keep monetary policy expansive longer than the goal of price stability requires.

It was therefore crucial that all Member States embark on a path to sound public finances after the crisis.

The forthcoming reform of EU financial rules should therefore draw lessons from the past.

"We need a credible and more binding set of rules," said Weidmann.

To this end, these rules would have to become “simpler and more transparent”.

The ECB's mandate should be interpreted narrowly

Weidmann emphasized that three things would have to come together for a stability-oriented monetary policy in the long term: “Firstly, a fiscal policy framework within the monetary union that ensures solid public finances;

secondly, central banks, which do not allow themselves to be absorbed by fiscal policy or the financial markets, and thirdly, a narrow interpretation of our mandate. "