European Central Bank (ECB) President Mario Draghi and Bundesbank President Jens Weidmann are clashing anew over how much more stimulus the ailing eurozone economy needs from the ECB.
As Europe’s woes again proved the chief concern at weekend meetings of the IMF in Washington, Draghi repeated that he is ready to expand the ECB’s balance sheet by as much as 1 trillion euros (US$1.3 trillion) to beat back the threat of deflation.
Weidmann responded by saying that a target value is not set in stone.
The differences at the heart of policymaking risk leaving the ECB hamstrung as the region’s economy stalls and inflation fades further from the ECB’s target of just below 2 percent. History suggests Draghi is set to ultimately prevail over his German colleague.
“In the end, Draghi will get his way and we will see quantitative easing next year,” said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt.
The ECB is swelling its balance sheet as it seeks to revive inflation of 0.3 percent, the lowest in almost five years.
By buying private-sector assets, as it plans to do from this month, or continuing to accept collateral from banks in return for cheap loans, it is pushing liquidity into the economy.
Still unresolved is whether it plans to ultimately buy sovereign debt, a taboo subject in Germany where politicians worry it amounts to financing governments and removing pressure on them to act.
Building up assets is the last monetary tool the ECB has left after it cut interest rates to a record low, Draghi said on Saturday in Washington.
Action taken so far pushed the euro as low as US$1.25 this month, the least since 2012.
The ECB’s balance sheet now stands at 2.05 trillion euros, below the 2012 peak of 3.1 trillion euros and 2.7 trillion euros at the start of that year.
The Bundesbank head is concerned that a balance-sheet target might lead to the ECB paying too much for assets under its programs to purchase asset-backed securities (ABS) and covered bonds, he said on Thursday.
An ECB spokesman said it is natural that policymakers hold a range of views which they discuss together at regular meetings in a collegiate environment.
A Bundesbank spokesman said that while Weidmann opposed the decisions on ABS purchases last month and this month, he agreed to far-reaching measures in June.
The eurozone re-emerged as the main worry of officials at the IMF’s annual meeting as they fret about the outlook for global growth.
The IMF last week cut its eurozone growth forecast to 0.8 percent for this year.
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