Bundesbank Head Says ECB Needs to Be Ready to Rein In Stimulus

By Tom Fairless Features Dow Jones Newswires

The European Central Bank shouldn't wait too long before withdrawing its large monetary stimulus, German central-bank president Jens Weidmann warned on Monday, wading into a debate over how quickly the ECB should signal a policy shift.

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Pressure has been building in Northern Europe for a policy change from Frankfurt as the region's economy picks up. Eurozone inflation recently jumped to 1.9%, within the ECB's target range, after languishing close to zero for years.

But top ECB officials have yet to signal they are ready to change course and start winding down their EUR60 billion-a-month bond-purchase program, known as quantitative easing or QE. ECB President Mario Draghi says the topic hasn't even been discussed by the bank's 25-member governing council.

Speaking in the German city of Bochum, Mr. Weidmann argued that the ECB's easy-money policies are currently appropriate because underlying inflation in the 19-nation eurozone -- excluding volatile food and energy prices -- remains weak.

If the region's economic recovery continues, however, the ECB "will move closer toward normalizing" its policy mix, the Bundesbank president said.

"It's important that the central bank tightens policy again when that's required for controlling inflation," Mr. Weidmann said.

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The Bundesbank president has been the most outspoken internal critic of the ECB's massive bond-purchase program, which is aimed at supporting growth and inflation in the currency bloc. He reiterated that criticism on Monday, arguing that bond purchases blur the boundary between fiscal and monetary policy.

In particular, the ECB shouldn't delay changing its policy mix because governments want to keep their borrowing costs low, he said.

Still, Mr. Weidmann argued it was "indisputable" that the ECB's easy-money policies are currently appropriate, even if there are different opinions about the right level of stimulus and the choice of instruments.

Over the long term, though, easy-money policies generate risks for the stability of the financial system by undermining the profitability of banks and potentially creating financial bubbles, he warned.

Write to Tom Fairless at tom.fairless@wsj.com

(END) Dow Jones Newswires

May 22, 2017 13:36 ET (17:36 GMT)