The major news making rounds over the weekend has been the comments from ECB’s Governing council member and Bundesbank Chief Jens Weidmann’s in an interview with a German newspaper. The main takeaways from the interviews, as reported widely by various media outlets have been the following:
- German growth could be better than expected next year (2015)
- Reiterates his opposition to the ECB’s sovereign bond purchases
While it is unsure how the Euro, which has in the past reacted to statements from the main members of the ECB, the recent comments from Weidmann however seem starkly confusing if not conflicting on many grounds.
The Bundesbank President noted that growth in Germany could be better than expected and that the situation wasn’t as bad as many expect it to be.
These comments seem to be a stark opposite to the Bundesbank views just earlier this month when the German central bank cut its growth forecasts for the next year to 1%, down from initial/earlier estimates of 2%. The Central bank expects that the German economy would expand by 1.4% in 2014, 1% in 2015 and 1.6% in 2016, a modest downward revision from its June forecasts. More importantly, the economic projections were also underlined by the fact that the officials expect the outlook to improve but at a very moderate pace and not enough to provide a boost to growth across the Eurozone.
On the statement in regards to opposing the ECB’s sovereign bond purchases, it was only earlier this month that the German Bundesbank, as part of its monthly report seemed to give out views that it was toeing the ECB’s line especially when considering that German Central bank’s language, which seemed to highlight the risks to the downside.
Quoting the German Bundesbank’s report, “The risks for the economic outlook in the euro area are on the downside. This would mean that at the beginning of the year, the “scope, pace and composition” of the ECB’s monetary measures would need to be ‘changed’.”
The markets quickly viewed this statement as the Bundesbank finally giving in to the majority view of the ECB to start engaging in purchasing sovereign bonds in the Eurozone, with a major decision likely to be taken during any of the three meetings during the first quarter of 2015.
The sentiment was also further strengthened by another hawk, Benoit Coeure who earlier this month sent a very clear message to the markets that the ECB was poised to push along with its QE sovereign bond purchase program.
The idea to raise the ECB’s balance sheet to close to 1 trillion Euros has failed miserably with a low turnout of TLTRO and TLTRO2 and has thus set the stage for the ECB to look into bond purchases, similar to the Fed’s QE program as the European Central bank has not much room to further steer monetary policy with interest rates already sitting at historical lows and one that ECB has constantly reminded the markets that there is no chance of cutting interest rates further.