ECB needs to show backbone when price pressure rises: Weidmann

ZURICH (Reuters) - The European Central Bank will need to “show backbone” when inflationary pressure rises in the eurozone although an expansive policy remains justified for now, ECB Governing Council member Jens Weidmann told an Austrian newspaper.

Bundesbank President Jens Weidmann makes remarks at a press briefing during the IMF and World Bank's 2017 Annual Spring Meetings, in Washington, U.S., April 21, 2017. REUTERS/Mike Theiler

The victory of centrist, pro-Europe candidate Emmanuel Macron in France’s presidential election has reduced political uncertainty but does not automatically give the ECB a green light to start tightening policy, Weidmann told Der Standard.

“We do not focus our monetary policy on political events, but on the price outlook. At present it is indisputable that an expansive monetary policy is appropriate. There are, however, quite differing views on the necessary degree of monetary expansion and the instruments we use,” he added.

Stripping out the impact of higher energy costs, upward pressure on prices was still subdued, he said. “But it will gradually increase with the economic recovery. This must be adequately taken into account in our forward-looking monetary policy, and there are also discussions about this in the Governing Council.”

With inflation now well in positive territory, the ECB has come under pressure from more conservative countries to dial back stimulus, even as underlying inflation remains weak and wage growth is muted.

Asked about differences with Austrian central bank Governor Ewald Nowotny and Weidmann’s more hawkish line on scaling bank ECB bond purchases, he said: “I certainly see sovereign debt purchases in the monetary union overall more critically than others because they lead to blurring the border between monetary policy and fiscal policy, which is particularly important here.”

With euro zone central banks the largest creditors of member countries, this could result in political pressure to stick to a very loose monetary policy longer than appropriate.

To counter fears that ECB policy could focus too much on debt service relief for member states, ECB policymakers need to be clear when price pressures pick up, Weidmann said.

“We cannot put off normalizing monetary policy out of consideration for state finances in some countries or because of possible losses by individual financial market participants. The ECB must then show backbone,” he told the newspaper.

Weidmann, head of Germany’s Bundesbank, said it was important that all euro zone countries stick to fiscal rules and that big countries France and Germany serve as role models.

German magazine Der Spiegel has reported that Berlin wants Weidmann to succeed Mario Draghi as ECB head. Asked by Der Standard if it were impossible to soon have a German ECB president, he said:

“You mean, this would be the only European top job with a certain nationality ruled out per se? No, seriously, the president of the ECB should be selected according to his qualifications and not his nationality.”

Reporting by Michael Shields; Editing by Louise Heavens and Helen Popper