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Merkel's Bavarian ally: ECB needs exit plan from zero rates

Merkel's Bavarian ally: ECB needs exit plan from zero rates
Merkel's Bavarian ally: ECB needs exit plan from zero rates   -   Copyright  Thomson Reuters 2021
By Reuters

BERLIN – The Bavarian ally of Chancellor Angela Merkel said on Tuesday consumer price inflation was the biggest challenge facing Germans, calling on the European Central Bank to prepare an exit plan from zero interest rates.

The comments by Markus Soeder, premier of the southern state of Bavaria, come after Friedrich Merz, the conservatives’ key expert for fiscal and economic policies, lashed out at the ECB‘s loose monetary policy.

The conservatives’ top candidate in Sunday’s election, Armin Laschet, has failed to translate Merkel’s high approval ratings into continued support for his party, with all polls putting Finance Minister Olaf Scholz and his Social Democrats in the lead.

Speaking to reporters in Munich, Soeder said that policy makers should work on measures to put the brakes on rising consumer prices and cushion the effects of higher inflation for households as this was amounting to “cold expropriation”.

Germany’s harmonized annual consumer price inflation (HICP) hit a fresh 13-year high at 3.4% in August, underlining growing price pressures as Europe’s largest economy recovers from the pandemic and firms struggle with supply shortages.

The national inflation rate (CPI) even soared to 3.9% in August, hitting its highest since December 1993 when the economy boomed following German reunification.

Bundesbank President Jens Weidmann has said his advisers anticipated inflation nearing 5% in Germany later this year before easing again due to pandemic-related special factors such as a temporary VAT cut which has affected comparisons.

“The ECB must act at the latest at 5%. What is needed is a measured exit plan from the zero interest rate policy,” Soeder said.

The ECB sees the annual inflation rate in the euro zone reaching 2.2% this year, falling to 1.7% next year and 1.5% in 2023 – well below its 2% target.

The ECB said on Sept. 9 it would trim its emergency bond purchases over the coming quarter, taking a first small step towards unwinding the emergency aid that has propped up the euro zone economy during the pandemic.

ECB board member Isabel Schnabel said on Monday that the central bank was set to use its bond-buying programme to guide investor expectations about an interest rate hike as the latter won’t come until the former ends.

Merkel is planning to stand down after the election and 16 years at the helm.

Merkel and Scholz have both avoided any direct comments on the ECB‘s monetary policy in recent years, pointing to the need to respect the central bank’s independence.