Cyprus Mail 31 December 2020 - by Reuters News Service
Bundesbank President Jens Weidmann warned euro zone governments forced to increase public debt to support their economies during the coronavirus pandemic not to expect the European Central Bank to keep interest rates low forever.
“We will not take into consideration sovereign debt servicing costs if price stability mandates higher interest rates,” Weidmann, a member of the ECB’s Governing Council, told the Rheinische Post newspaper in remarks published on Thursday.
“In their own interest, governments should prepare for a rise in interest rates and not pretend that their debt burden can be serviced easily,” said Weidmann.
Reeling under the weight of a coronavirus-induced recession, European Union nations agreed earlier this year on an unprecedented 750 billion euro recovery package, funded by a joint debt issuance, a once-taboo subject long criticised by Germany. Member states have also taken on separate new debt to support their economies during the crisis.
The European Central Bank approved a fresh stimulus package this month, saying 2021 would remain difficult. It predicted that vaccinations could lead to sufficient levels of herd immunity by the end of the year.
However, in its last Monetary Policy statement, the ECB Governing Council said that it expected “the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2 per cent within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.”
The Eurozone is in increasingly deep deflation, although inflation expectations have stopped declining recently. The new forecasts for inflation are unlikely to show it returning to the target level by 2023, economists said.
New lockdowns across Europe are expected to slow output once again, and that means inflation is also unlikely to fulfil previous forecasts for the fourth quarter, as consumption is also slowing.
