New Bundesbank President Jens Weidmann signaled he may be as much of an inflation hawk as his predecessor Axel Weber, using his first speech to call for more policy tightening by theEuropean Central Bank.
One of the ECB’s key challenges is to “formulate a return to monetary policy normality,” Weidmann said in Frankfurt yesterday after replacing Weber at the helm of Germany’s central bank. “Short-term crisis measures can, when administered as a long-term medication, be associated with considerable side effects,” he said, echoing Weber, one of the most ardent inflation fighters at the ECB.
“Weidmann will certainly follow in Weber’s footsteps,” saidCarsten Brzeski, an economist at ING Group in Brussels. “But initially it will be a challenge for him to establish his position among the old boys at the ECB.”
Weidmann is one of up to seven changes on the ECB’s 23- member Governing Council in a year marked by the retirement of President Jean-Claude Trichet. The new generation of central bankers under the likely leadership of Italy’s Mario Draghi will reinforce the ECB’s resolve to stamp out inflation, say economists at Citigroup Inc. and Societe Generale SA.
“In the short-term, the ECB may turn more hawkish,” saidKlaus Baader, co-chief euro-area economist at Societe Generale in London. “Draghi will want to show he’s not lax about inflation risks and the new members will keep their voices down, strengthening the influence of established hawks like chief economist Juergen Stark.”
Chicago
Germany, the only one of the four biggest euro countries yet to endorse Draghi, lost its favored candidate for the job when Weber in February unexpectedly announced his decision to step down. Weber, an economics professor, will join the University of Chicago to teach a course on central banking.
Weidmann, previously Chancellor Angela Merkel’s chief economic adviser, is likely to support further ECB rate increases to curb mounting inflation pressures, said Juergen Michels, chief euro-area economist at Citigroup in London.
“Weidmann won’t rank behind Weber in terms of hawkishness,” said Michels. “It also doesn’t seem that the successors of outgoing council members will be less focused on inflation fighting.”
ECB Exodus
In April, Luc Coene replaced Guy Quaden at the head of Belgium’s central bank. Next month Peter Praet, another Belgian, will succeed Gertrude Tumpel-Gugerell on the ECB’s Executive Board, whose six members together with the central bankers of the 17 euro nations comprise the Governing Council.
In July, Malta’s central bank governor Michael Bonello will be replaced by Josef Bonnici, and Nout Wellink will step down as head of the Dutch central bank. Lex Hoogduin, 54, has been tipped by academics and bank officials as his likely replacement.
The selection of Draghi to succeed Trichet, whose term ends on Oct. 31, may force two further changes.
Italy would need to appoint a new governor to join the ECB’s council in Draghi’s stead, and Lorenzo Bini Smaghi would probably have to make way for a new French policy maker on the Executive Board to avoid Italy dominating the ECB’s top decision-making body.
Estonia’s adoption of the euro on Jan. 1 saw Andres Lipstok join the ECB council this year, bringing the potential number of new faces to eight.
‘Too Accommodative’
ECB policy makers, who raised the benchmark rate by a quarter point to 1.25 percent last month, next convene on May 5 in Helsinki. Some economists expect them to signal that another move will come as soon as June.
Monetary policy is “still too accommodative,” Coene said in an interview on April 18, striking a tougher tone than his predecessor Quaden, who on March 31 endorsed a “cautious” rate increase.
Draghi has also sharpened his language. While Trichet said last month’s rate step wasn’t necessarily the start of a series, Draghi signaled more to come. “Monetary policy must take into account the emergence of inflationary tensions, pushed by rising food and energy prices,” he said on April 13.
Most economists and investors predict two more quarter- point increases in the ECB’s benchmark rate this year, taking it to 1.75 percent.
“We believe the ECB has to raise interest rates higher than markets expect,” Andrew Bosomworth, a fund manager at Pacific Investment Management Co., wrote in a guest commentary for Germany’s Boersen-Zeitung on April 28. “The ECB’s benchmark rate is still too low in light of economic growth and inflation expectations.”
Faster Inflation
Inflation, which the ECB aims to keep just below 2 percent, accelerated to 2.8 percent last month. Incoming policy makers will have to weigh that against the risk of inflaming the sovereign debt crisis that’s afflicting peripheral nations such as Ireland, Greece and Portugal.
As the representative of Europe’s largest economy, Weidmann will be central to those deliberations. At 43, he is the youngest president in the Bundesbank’s 54-year history and the youngest ECB council member.
Fluent in English and French in addition to his native German, Weidmann is a former student and protégé of Weber. Yesterday, he indicated he shares many of Weber’s views.
Weidmann lauded the ECB’s focus on monetary aggregates as an indicator of future inflation, and said the bank must keep price stability as its primary goal. The Bundesbank’s “culture of stability” will be maintained under his leadership, he added. www.bloomberg.com
