31 January 2013

Bundesbank/Weidmann: "We need to remain vigilant"

Mr Weidmann, are the days of independent monetary policy over?

No, but given recent developments, we need to remain vigilant.  At the moment, we are seeing a mood swing vis-à-vis central banks – in Japan, for example, where the government is currently putting heavy pressure on the central bank.

How did this happen?

One major reason is that the central banks have taken on more and more tasks that lie outside their core mandate of safeguarding price stability. They are being pressured into stimulating the economy, propping up the financial system and facilitating government borrowing.

But the crisis would have escalated otherwise.

I am not suggesting that we do nothing. We reached a consensus within the ECB’s Governing Council on a whole range of measures designed to curb the crisis, including the decision to supply banks which could provide the required collateral with as much liquidity as they desire. Any crisis resolution responses above and beyond these measures are tasks for fiscal policymakers, because central bank independence is both a prerogative and an obligation. It is precisely because our mandate is essential to safeguarding price stability that we cannot extend it too far.

Why not?

The more central banks encroach on fiscal policy territory, the more their democratic legitimacy is called into question and the louder the calls for stricter parliamentary control. This is understandable, because the independence of a central bank in a democracy is justifiable only if its mandate is clearly defined and delimited. But the stricter parliamentary control becomes, the greater the risk that monetary policy will also be influenced and the objective of price stability called into question. Conversely, politicians do not benefit if they transfer too many tasks and political decisions to the central bank.

The crisis was caused by excesses in the financial sector, not rising prices.

And politicians are responding to that fact with a whole range of measures. Tougher rules such as the new capital requirements for banks and extra powers for supervisors are designed to prevent excesses of this kind from happening in future. The central banks, too, will play an important role in the field of financial stability, not least because they have comprehensive data and analytical capacities. However, price stability must remain their primary goal.

Politicians often take a long time to make decisions. You react more quickly.

I do not think it is true to say that politicians are incapable of taking action. That is an argument which is used time and time again to increase pressure on the central banks. It must be tempting to transfer quasi-fiscal tasks to central banks and thus circumvent political processes that are often perceived as being complex and protracted. However, in the medium term, this will lead to an even more heated debate about the concentration of powers at central banks. This is an even more sensitive issue in the euro area, with its mix of a single monetary policy coupled with multiple national fiscal policies, than in Japan or the USA.

Would a return to a gold standard be a solution? Money would then be removed from political control.

Past experience has shown that this would be too rigid a commitment. Central banks need to be able to react flexibly in times of crisis – within a clear and narrowly defined mandate.

So are we about to experience a major bout of inflation?

In Europe, the independence of the central banks is de jure firmly enshrined in the EU treaties, so that is a hypothetical question. And weaker economic momentum means that inflation is not currently an issue. In the long term, of course, price stability would be at risk if the central banks were de facto to be taken hostage by the politicians. These are the lessons we learned from the inflation shocks that occurred in the 1970s and 1980s. The acid test will come when the economy picks up and it is time to tighten the reins of monetary policy once more.

Full interview

© Deutsche Bundesbank