March 30, 2014 1:57 pm

Weidmann plays tactical game with moderation of tone on ECB policy

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Jens Weidmann, Deutsche Bundesbank president©Bloomberg

Jens Weidmann, Bundesbank president

The arch hawk of the European Central Bank has frequently found himself in a minority of one. But for Jens Weidmann, the appeal of being the person who is convinced everyone else is wrong appears to have waned.

With the euro close to multiyear highs against the dollar and data out on Monday that are likely to show eurozone inflation falling yet again, the president of Germany’s Bundesbank has become more conciliatory.

Last week, Mr Weidmann said he could back quantitative easing under certain conditions, should the single currency’s strength continue to push down inflation by lowering the cost of imports.

News that the man who had attacked the ECB’s earlier government bond-buying policy, the outright monetary transactions programme, as possibly illegal was now publicly warming to QE startled global investors.

Mr Weidmann has also surprised some on the ECB’s governing council of late by backing measures such as the strengthening of the bank’s forward guidance on interest rates. The Bundesbank also claimed it was only the timing of last November’s rate cut, not lower borrowing costs in general, that he was against.

Yet many believe that Mr Weidmann’s shift towards the middle ground is a tactical manoeuvre – a moderation of tone – rather than any real softening of his or the Bundesbank’s view.

“You don’t always want to be the dissenter. If everyone thinks you’re always going to vote against the majority, then you lose your influence,” said Jörg Krämer, chief economist at Commerzbank.

“The Bundesbank has been communicating their position in a way that is less harsh. They don’t want to be perceived as against anything per se, but rather stress that conditions need to be fulfilled before you act.”

Mr Weidmann’s comments have another advantage: by creating a hypothetical scenario in which he would act, he could lessen the chances of that scenario becoming reality. His show of falling into line on QE has weakened the euro, which edged down against the dollar this week. While this fall could easily be countered, the Bundesbank president’s comments have made the case for action less compelling.

“He is trying to encourage the market not to give up on the ECB altogether. After all, looser talk from the Bundesbank president might just keep the euro from appreciating to the point where the rest of the council will push for looser policy,” said Richard Barwell, economist at RBS.

Huw Pill, economist at Goldman Sachs and a former ECB official, said: “The hope is that with greater unanimity, you make your conditional promise to act stronger – and the need to act less likely.”

Mr Weidmann is not the only one raising hypotheticals that until recently were regarded as unmentionable. ECB president Mario Draghi has hinted that the euro needs to weaken, while Erkki Liikanen, governor of the Bank of Finland, who is seen as a good signifier of the middle ground on the governing council, and Sabine Lautenschläger, an ECB executive board member who has recently joined from the Bundesbank, have offered their support for negative deposit rates if the single currency stays strong.

Looser talk from the Bundesbank president might just keep the euro from appreciating to the point where the rest of the council will push for looser policy

- Richard Barwell, RBS

The Bundesbank president has said negative rates, which in effect impose a tax on deposits parked at the ECB, are the best defence against a strong single currency, signalling he would support this ahead of QE.

“Over the past month, two things have changed: the ECB has started to talk down the euro, and Weidmann, Liikanen and Lautenschläger have mentioned negative deposit rates in connection with the currency’s strength,” said Reinhard Cluse, a managing director at UBS Investment Bank.

While there is speculation that the ECB could plump for one of its more cosmetic tools, such as a cut in its main refinancing rate or extra liquidity, as early as this Thursday’s governing council vote, Mr Weidmann is unlikely to support more radical action before the next forecast round in June. Even with his backing, legal and operational hurdles to QE would be awkward to clear.

The Bundesbank president suggested any QE programme would have to buy private-sector bonds and take into account the risks associated with different assets or it would breach ÊU treaty rules. But buying such a broad range of debt in such a way is fraught with technical difficulty.

The council will hope its pronouncements are convincing enough to weaken the euro without the need for QE. However, after months of talk but no action, some observers are beginning to think the council is mistaken. Mr Pill said: “Market participants are assigning less and less weight to what they’re saying.”

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