ECB’s Weidmann Predicts Wage Gains as He Seeks QE End-Date

European Central Bank policy maker Jens Weidmann reiterated his call for a definite end-date for the institution’s bond-buying program, a refrain that looks likely to gain traction among his colleagues next year.

Saying that domestic price pressures should strengthen as wage growth improves, he said they are “therefore on track toward our definition of price stability.”

While policy makers meeting last week reaffirmed their commitment to buy debt until September “or beyond,” officials including at least half the six-member Executive Board have signaled they’re willing to rein in expectations for another extension. The euro area is currently undergoing the broadest economic expansion in its history, and the ECB this month upgraded its growth forecasts for the bloc.

“A faster conclusion of net asset purchases and a clearly communicated end date would have been reasonable,” Weidmann, who also heads Germany’s Bundesbank, told reporters in Frankfurt late Monday.

Despite the upturn, the ECB remains well short of its inflation goal of just under 2 percent — and Germany is a prime example of the conundrum. There, record-low unemployment and economic growth above its long-term potential has still failed to generate much in the way of wage growth. Weidmann said he’s confident that will soon change.

“We don’t get involved in wage bargaining and respect the independence of bargaining partners. But we expect that the increased capacity utilization and regionally appearing bottlenecks in some labor markets will lead to somewhat higher wage pressure,” he said. “That’s a projection, not a recommendation.’’

What Our Economists Say…
“Bloomberg Economics has scanned a range of indicators and sees no convincing evidence that underlying cost pressure is building. If the ECB is true to its word, the outlook for prices should extend asset purchases beyond September.”

— Jamie Murray, Maxime Sbaihi and David Powell, Bloomberg Economics

Executive Board member Yves Mersch said on Dec. 6 that in the current environment, the Governing Council “should think carefully how much we pre-commit” on stimulus. His colleague Sabine Lautenschlaeger has repeatedly called for a firm end-date to the program. Benoit Coeure, who is responsible for market operations, has said he expects the ECB to change the policy language that links bond purchases to progress on inflation.

Reflecting on the debate on Thursday, a Slovak central banker Jozef Makuch said discussions among policy makers were increasingly moving from “asset purchases to the eventual future use of interest rates to regulate the economy.” Expansion appears to be stable and inflation has gotten closer to the goal, he told reporters in Bratislava.

His colleague Ardo Hansson was more cautious. It was important for the ECB to move gradually when adjusting policy guidance as wage and price growth remains slow, the head of Estonia’s central bank said at a news conference in Tallinn.

President Mario Draghi said after the ECB’s Dec. 14 meeting that officials didn’t discuss changing the guidance on asset purchases.

In his wide-ranging remarks, Weidmann also touched on bitcoin, Basel III, and French President Emmanuel Macron’s proposals for institutional reform of the euro area.

“Price developments seem to be of speculative character, and if you write that every other day a new record is reached, even the last person might feel forced to participate in this wave”

On regulation: “Just because investors can lose money, isn’t a reason to get involved. There are many other ways to engage in unsound transactions and lose money.”

“The hurdle for regulatory action is quite high in my view.’’

Euro-Area Reform
“Macron’s proposals reach far beyond stabilizing the monetary union.”

“A stabilization facility to soften asymmetric shocks as proposed by Macron and the Commission, I consider unnecessary and also not expedient.’’

Basel III Bank Rules
“The agreements of the Basel Committee now need to be implemented completely and without any curtailments. That is particularly true for the U.S. and the trading book.’’
Source: Bloomberg