Frankfurt am Main (AFP) – The European Central Bank must catch the right moment to wind down mass bond-buying and raise interest rates ahead of possible future downturns, Germany’s top central banker said Thursday.
“The ECB governing council must be careful not to miss the right time to normalise monetary policy,” Bundesbank (German central bank) chief Jens Weidmann said in a lecture to the Institute of Monetary and Financial Stability in Frankfurt.
“I’m not talking about a full stop, but about not continuing to ram the gas pedal constantly to the floor.”
Observers are eyeing the ECB closely for the moment it begins to wind down its 60 billion euros ($71 billion) per month of government and corporate bond purchases.
Along with historic low interest rates, the purchases are designed to pump cash through the financial system, powering growth and pushing inflation towards the central bank’s target of just below 2.0 percent.
ECB President Mario Draghi said last week that governors would decide on the next steps for their bond-buying scheme at a meeting in October, as the 19-nation eurozone appears increasingly recovered from its drawn-out financial crisis.
But interest rates — the lever central bankers use in normal times to spur on or rein in the economy — are expected to remain low until long after the purchases come to an end, which many analysts expect late next year at the earliest.
If rates are already low when a crisis hits, the ECB could find itself in a bind.
“We have to think about how much room to manoeuvre we will have when the next downturn comes,” Weidmann said.
The German central banker has long pressed his eurozone colleagues for a speedy end to “unconventional” monetary policy, saying the threat of deflation it was introduced to fight has now been dispelled.