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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
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."
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