The European Central Bank will not be able to protect governments from higher borrowing costs if inflation spikes, Bundesbank President Jens Weidmann warned in an interview published on Sunday.
“The ECB is not there to deal with the security of the solvency of the States”, declared the head of the German central bank. said Welt Am Sonntag .
Weidemann, who sits on the ECB’s Governing Council, said the European Central Bank should tighten monetary policy if inflation increases sustainably.
“We will then not be able to take into account the financing costs of the states,” he told the newspaper.
EU governments have taken on debt to finance spending programs to combat the economic fallout from the pandemic.
It raises fears that rising inflation could trigger a nightmare scenario, driving up interest rates and burdening countries with billions more dollars in debt servicing costs.
Weidmann said he couldn’t rule out higher inflation in the long run.
“I don’t consider higher inflation rates to be out of the question,” he said. “In any event, I urge you to watch the risk of too high an inflation rate closely and not just look at the risk of too low an inflation rate.”
Weidmann also argued that the ECB’s emergency bond purchases under the Pandemic Emergency Purchase Program (PEPP) should end once the crisis is over.
“It’s a matter of credibility,” he said, adding that the ECB’s asset purchase program (APP) is also not expected to continue indefinitely.