February 8, 2018 / 9:10 AM / a year ago

Euro rise, stocks rout don't justify big ECB QE extension: Weidmann

FRANKFURT (Reuters) - The euro’s strength and the recent stock market rout do not justify any substantial extension of the European Central Bank’s bond purchase scheme, Bundesbank President Jens Weidmann said on Thursday.

FILE PHOTO: Jens Weidmann, President of German Bundesbank attends the Generation Euro Students' Award ceremony at the European Central Bank (ECB) headquarters in Frankfurt June 20, 2012. REUTERS/Alex Domanski/File Photo

The ECB’s 2.55 trillion euro bond buying programme is due to run until the end of September, and policymakers are debating whether to wind down the programme by the end of the year, even if inflation remains muted.

“The favourable economic outlook lends credence to the expectation that wage growth and therefore domestic price pressures will gradually increase in keeping with a path towards the Governing Council’s definition of price stability,” Weidmann told a business conference.

“If the expansion progresses as currently expected, substantial net purchases beyond the announced amount do not seem to be required,” added Weidmann, who sits on the ECB’s Governing Council.

The comments, ruling out a substantial increase, would suggest Weidmann could still accept a small extension to gradually wind down the programme instead of ending it in a single step.

“The recent appreciation of the euro seems unlikely to jeopardise the expansion,” he added. “Research suggests that the exchange rate pass-through, which is to say the impact of exchange rate movements on inflation, has declined.”

Weidmann added that in some respects, the euro zone economy is in better shape than the United States was when the U.S. Federal Reserve ended its own bond buying, known as quantitative easing.

He also said the ECB should not be unsettled by the recent stock market turbulence since it comes after a long rally with no notable corrections.

Repeating his long-standing argument, Weidmann said that once the ECB’s bond buys end, policy will continue to be accommodative as inflation still needs central bank support to pick up.

“Given the rather subdued inflationary pressure at present, an accommodative monetary policy stance remains appropriate in the euro area,” he said. “Even after the net purchases have ended, the monetary policy stance will remain loose.”

Reporting by Balazs Koranyi; Editing by Gareth Jones

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