'ECB must buy bonds to prevent German inflation'

'ECB must buy bonds to prevent German inflation'
Photo: DPA

Germany could be hit by dreaded inflation if the European Central Bank (ECB) is prevented from buying bonds issued by countries like Italy and Spain, Italian Prime Minister Mario Monti warned on Wednesday.


Monti's comments published in the Italian daily Il Sole 24 Ore a few hours before he was due in Berlin, argued for resuming a revamped ECB bond-purchasing programme that has been opposed by Germany’s influential central bank, the Bundesbank.

Pointing to the wide spread between the interest rate or yield, on Italian and German bonds, Monti said it could lead to a "potential rise in inflation for Germany which, I believe, doesn't correspond to the ECB or German government's wishes."

The Italian premier explained that inflation could result from a substantial rise in the amount of money available within the 17-member eurozone along with low interest rates and rising bond prices.

In August, rising fuel prices pushed German inflation back up to the key level of 2.0 percent, the first time this year that inflation in Europe's top economy has risen.

Germans are reluctant to back large-scale purchases of bonds issued by heavily-indebted eurozone partners, but Europe's biggest economy is historically sensitive to the threat of inflation.

Monti declined to confirm that he would raise the issue with German Chancellor Angela Merkel during his visit, but told the Italian newspaper: "It's right to stress that this is a serious imbalance for us, but it's also a risk for those countries that today seem to benefit from it," like Germany.

Seperately, ECB head Mario Draghi said on Wednesday the bank would always act within its mandate to ensure price stability in the euro area, but exceptional measures might be required to achieve that.

“Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools," Draghi wrote in an editorial for German weekly Die Zeit.

The ECB is under intense pressure to don its fire-fighting helmet once again and re-launch a contested programme to buy up the sovereign bonds of debt-wracked countries and bring down their borrowing costs.

But Draghi's German colleague on the ECB governing council, Bundesbank chief Jens Weidmann, is strongly opposed to such a move, arguing that the practice is tantamount to monetary financing, where the central bank prints money to pay off a country's debt - something expressly forbidden under the ECB's statutes.

In an opinion piece, to be published in on Thursday but released in advance, Draghi countered that "when markets are fragmented or influenced by fears, our monetary policy signals do not reach citizens evenly across the euro area.

"We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens," the Italian central banker said.

"This may at times require exceptional measures. But this is our responsibility as the central bank of the euro area as a whole."



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