ECB must tighten policy to 'counter' inflation, warns policymaker

The ECB is not there to take care of the solvency protection of the states, ECB policymaker Jens Weidmann has warned.

'I do not rule out higher inflation rates,' says Jens Weidmann. Picture: Sean Gallup/Getty Images)

The European Central Bank must tighten monetary policy if it needs to counter inflationary pressures, and cannot be put off from doing so by the financing costs of eurozone states, ECB policymaker Jens Weidmann has said.

Eurozone countries have ramped up their borrowing to cope with the coronavirus pandemic, potentially leaving them exposed to increased debt servicing costs if the central bank tightens policy to counter upward pressure on prices.

"The ECB is not there to take care of the solvency protection of the states," said Weidmann, whose role as president of Germany's Bundesbank gives him a seat on the ECB's policymaking Governing Council.

Should the inflation outlook rise sustainably, the ECB would have to act in line with its price stability objective, Weidmann said.

We have to make it clear again and again that we will tighten monetary policy if the price outlook calls for it," he said.

"We cannot then take into account the financing costs of the states."

After its July 22 policy meeting, the ECB pledged to keep interest rates at record lows for even longer to boost sluggish inflation, and warned that the rapidly spreading Delta variant of Covid-19 posed a risk to the euro zone's recovery.

"I do not rule out higher inflation rates," Weidmann said. 

The eurozone economy grew faster than expected in the second quarter, pulling out of a pandemic-induced recession, while the easing of coronavirus curbs also helped inflation to shoot past the ECB's 2% target in July, hitting 2.2%.

Reuters