MNI POLICY: ECB Must Stick to Narrow Mandate - Buba's Weidmann

By Luke Heighton

     FRANKFURT (MNI) - The European Central Bank must act within the limits of a

narrow interpretation of its mandate if it is to uphold its "unlimited

commitment" to the euro, Bundesbank president Jens Weidmann said Monday.

     The purchase of sovereign bonds on a major scale "can be a legitimate and

effective tool of monetary policy," Weidmann said in a speech given remotely to

the Frankfurt Finance Summit. Bundesbank researchers "and others, too, have

found that the PSPP impacts positively on output and inflation in the euro

area."

     But, he cautioned, they also "blur the line" between monetary and fiscal

policy, and so can "pose a problem in a monetary union where fiscal

responsibility generally rests with the member states."

     Weidmann said he agreed with ECB president Christine Lagarde that "there

are no limits to our commitment to the euro," but that the flexibility

associated with the ECB's pandemic emergency asset purchase programme (PEPP),

should not "set the wrong incentives" for public finances by suggesting central

bank support is "unbound."

     The ECB's capital key provides a "useful benchmark for PEPP holdings at the

end of our net purchases," Weidmann said, emphasising the specificity and the

temporary nature of the programme.

     "Policymakers must not assume that we would keep the financing costs of

governments low forever or iron out any differences in sovereign risk premia,"

he said. "When the inflation outlook requires a normalisation of monetary

policy, the Eurosystem needs to do what is necessary to safeguard price

stability. Otherwise, we would end up with a regime where monetary policy

prioritises government solvency over the objective of price stability - a regime

that economists call fiscal dominance.

     "A narrow interpretation of the mandate is therefore of the essence,"

Weidmann said, adding that it was up to central bankers to "explain to the

public how we fulfil the mandate we have been given."

     "Otherwise," he concluded, "our independence could ultimately be called

into question, and our ability to maintain price stability might be impaired."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: M$X$$$,MT$$$$,M$$EC$]