Bundesbank’s Jens Weidmann maintains hawkish rhetoric despite slowing inflation

This week’s readings from across Europe provided enough evidence to suggest that inflation is once again slowing down after a spike earlier this year.

• Readings from France showed that inflation declined to 0.9 percent, which is the weakest level in five months.
• German inflation reached a four-year high of 2.2 percent in February, however, the latest reading has shown that inflation declined to just 1.4 percent in May. The reading was weaker than the median consensus of 1.6 percent.
• Inflation in Spain has moderated to 2 percent in May from 3 percent earlier this year.
• Inflation in Italy declined from 2 percent in April to just 1.5 percent in May.

The Eurozone inflation declined from 1.9 percent in April to just 1.4 percent in May. While financial markets and analysts would like to believe that these sets of readings would relieve German pressure on the European Central Bank (ECB) to increase interest rates, the German central bank chief, Mr. Jens Weidmann would think otherwise. The latest comments from him strongly suggest that he is to maintain his hawkish rhetoric.

Mr. Weidmann suggested that with Eurozone recovery gaining pace, the inflation would continue to rise even if the central bank winds up its accommodative monetary policies. He said, “The strengthening of the economic recovery makes it increasingly likely that the rise in inflation we have seen since August 2016 is not just a flash in the pan, but that we would have higher inflation rates compared to previous years even under a reduced degree of monetary policy accommodation…….. In my view, the current economic outlook together with the improvement in the balance of risks suggests that the Governing Council is beginning to discuss whether and when it will be time to adjust our forward guidance”.