ECB's Weidmann backs easy policy but has warning for governments

FILE PHOTO: German Bundesbank President Jens Weidmann attends the 29th Frankfurt European Banking Congress (EBC) at the Old Opera house in Frankfurt, Germany November 22, 2019. REUTERS/Ralph Orlowski

FRANKFURT (Reuters) - The European Central Bank’s top policy “hawk” Jens Weidmann on Thursday threw his weight behind the ECB’s response to the coronavirus pandemic but warned governments they should not expect this largesse to last forever.

The ECB all but announced last week that more monetary stimulus would be coming in December, likely in the form of more bond purchases and subsidies to banks, to help the euro zone’s economy deal with the second wave of the outbreak.

Weidmann, the Bundesbank’s president, said he expected the economic fallout of the second wave to be less severe than the one seen in the spring but still backed the ECB’s easy stance.

“It is important that monetary policy remains expansionary, as the economic slump is weighing on the inflation outlook and a lack of liquidity in the financial system might dangerously aggravate the crisis,” he told an event in London via weblink.

But he warned governments piling up debt that they should not get used to ultra-low borrowing costs and even refused to rule out that inflation, that has been elusive in the euro zone for a decade, could make a comeback.

“Cheap money may be increasingly seen as the normal state,” Weidmann said. “Under those conditions, even high debt burdens may appear sustainable to governments. But what if conditions change?”

Reporting By Francesco Canepa; Editing by Balazs Koranyi