Low price pressures justify expansionary monetary policy stance

President Jens Weidmann used his speech to articulate the Bundesbank's view that it is sensible and appropriate at the current juncture for monetary policy to be in accommodative mode, given that euro-area inflation rates are picking up at no more than a gradual pace. He acknowledged that this expansionary stance had prompted no little criticism from people in Germany, who took a particularly dim view of the very low interest rates and the impact they might have on their private retirement provisions.

Yet, he countered, monetary policy cannot be viewed only from the perspective of savers. "This is because citizens are generally not just savers; they are also employees, shareholders, taxpayers and property owners," he cautioned. The more low interest rates stimulate economic activity as a way of lifting price levels, the more they also secure jobs, increase tax receipts and create sales opportunities for enterprises, Mr Weidmann argued.

The exceptionally low real long-term interest rates, he added, are also a consequence of the subdued long-term growth expectations for the euro-area countries. "While monetary policy can smooth the economic cycle, it is unable to bring about sustained growth," Weidmann reasoned, explaining that it is up to governments here to set the right course through growth-oriented economic policy.

The Bundesbank President conceded that monetary policymakers bore some of the responsibility for the low long-term interest rates – not only have they lowered the short-term policy rate to zero and sent the deposit rate into negative territory; the Eurosystem is also compressing interest rates at the longer end of the yield curve with its government bond purchases.

Japan a cautionary example

Weidmann reiterated his view that government bond purchases entail particular risks and side-effects: "What's especially troubling about these purchases is that they blur the lines between monetary and fiscal policy." The central banks of the Eurosystem, he noted, have already become the biggest creditors of the euro-area countries. Once finance ministers get used to the favourable financing conditions, he argued, there is a danger that monetary policy will become harnessed to fiscal policy. Monetary policymakers could then come under pressure to make high levels of debt sustainable through permanently low interest rates, Mr Weidmann warned.

At the same time, he noted that the longer the ultra-accommodative monetary policy remains in force, the more the positive effects are decreasing, while the undesired side-effects are becoming increasingly evident. "The side-effects include the erosion of profitability of the banking sector. This, in turn, is making it more difficult to build up additional capital, creates financial stability risks and, as a result, can also reduce the effectiveness of monetary policy," the Bundesbank President cautioned.

That, he reasoned, was why the measures already adopted should first be allowed to take effect, pointing to Japan as a country where monetary policy has been unable to resolve structural problems, even after ramping up its measures time and again. In light of Japan's public debt of just under 250% of GDP, holdings of government securities in the central bank’s balance sheet accounting for 65% of GDP, and annual bond purchases running at twice the rate of net new borrowing, Japan is not a role model for the euro area, Mr Weidmann affirmed.

Pension adjustments unavoidable

Turning his attention to the pensions debate, the Bundesbank President remarked that demographic developments in Germany made adjustments inevitable if pension funding arrangements were to be placed on a sound long-term footing. A pension system with a fixed retirement age, stable contribution rates and a constant level of pensions cannot survive in the long term, he argued, saying that adjustments will need to be made to at least one of those levers.

This is not about taking something away from today’s pensioners, Weidmann pointed out, but about their children's longer life expectancy, which means that they will draw a pension for longer. Without adjustments to the system, this would have to be completely funded by current pensioners’ grandchildren and great grandchildren, he contended. And in Mr Weidmann's words, it’s not just a question of which generation gets which piece of the cake, but also about how big the cake will actually be in the first place. This is because an increasing burden of taxes and social security contributions endangers economic growth, as became clear following reunification. 

Weidmann welcomed the recent presentation of the Federal Employment Ministry's extended projection of pension insurance developments up to the year 2045. Now people who are still a number of years away from retirement are also in a position to assess what lies ahead of them. Official projections extending that far into the future had previously been unavailable, prompting the Bundesbank to publish its thoughts on the longer-term pension developments in its August 2016 Monthly Report.

Inaugural Capital City Reception

Weidmann made these remarks at the Deutsche Bundesbank's inaugural Capital City Reception in Berlin. The Bundesbank deliberately opted for this particular type of event as a way of reaching out to more than just a specialist audience. The Bundesbank sees the Capital City Reception format as an ideal opportunity to make central bank topics even more of a talking point in Germany's capital city and to connect with the public.

"Times have changed since the financial crisis, and central banks today come in for a great deal more public scrutiny," Mr Weidmann emphasised, acknowledging how not just the low interest rates, but also the supposed abolition of cash, were sparking lively and heartfelt debate among broad sections of the population.