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ECONOMY

Bundesbank’s Weber says ECB to hold course into 2011

Bundesbank chief Axel Weber indicated Friday the European Central Bank would pursue relaxed monetary policies into 2011 while suggesting he might not be a "diplomatic" ECB head.

Bundesbank's Weber says ECB to hold course into 2011
Photo: DPA

Weber, a leading candidate to take over as ECB head next year, told Bloomberg television Europe’s monetary authorities should help commercial banks make it through the end of the year before deciding when to withdraw exceptional measures taken to support them through the crisis.

“Most of these discussions about the continuation of the exit I think will be focused on the first quarter” of 2011, Weber said.

That suggested the ECB would continue for now to provide commercial banks with a full allotment of their bids for central bank loans.

But Weber added: “It’s clear that we need to re-embark on a normalisation procedure” to gradually get the eurozone banking system back to where it was before the global financial storm broke in August 2007.

His comments went further than others by ECB president Jean-Claude Trichet in suggesting the central bank would support banks for longer than some analysts have assumed.

But they also showed the ECB felt the 16-nation eurozone was getting to grips with its economic and financial crisis, whereas the US Federal Reserve recently voiced caution about an uncertain US economic recovery.

Germany is leading a eurozone rebound after posting record growth of 2.2 percent in the second quarter but Weber stressed that “we are in year four of the crisis and the markets are still fragile.”

Meanwhile, the 53-year-old German central bank governor was asked if he was diplomatic enough to head the ECB after Trichet steps down in October 2011.

“It’s important to be a diplomat for the diplomatic corps, it’s not so important for a central bank,” Weber said.

He is considered a policy “hawk” due to a consistent focus on battling inflation but some observers say Weber might lack the sense of consensus attributed to another candidate, Italian central bank governor Mario Draghi.

“I think it’s very important for central banks to be clearly focused and also, if necessary, to deliver undiplomatic messages to governments,” Weber said.

Barclays Capital analyst Julian Callow said that “Weber’s views concerning the full (loan) allotments might also be influenced by his desire to position himself as the successor to Mr. Trichet as ECB president.”

Weber declined to discuss the issue directly, saying: “We should focus all our energy and attention on solving the economic problems that we face.”

But Callow felt Weber’s remarks were noteworthy since “he is pre-empting the discussion that was meant to be scheduled for the next (ECB) policy meeting,” and “might perhaps be an irritation” to Trichet.

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ECONOMY

How is Denmark’s economy handling inflation and rate rises?

Denmark's economy is now expected to avoid a recession in the coming years, with fewer people losing their jobs than expected, despite high levels of inflation and rising interest rates, The Danish Economic Council has said in a new report.

How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year. 

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’,  Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.  

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn. 

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment? 

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024  about 1 percent below the estimated structural level. 

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending? 

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”.  The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”. 

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025. 

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023. 

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write. 

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers. 

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.” 

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