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UPDATE 1-Bundesbank chief defends ECB bond purchases in wake of court case

16 Sep 2020 / 21:22 H.

    (Adds sources)

    BERLIN/FRANKFURT, Sept 16 (Reuters) - Bundesbank chief Jens Weidmann on Wednesday defended the European Central Bank's bond purchases in the face of criticism from some German lawmakers, parliamentary sources said.

    Weidmann spoke to the lawmakers via a video-link and answered questions in a closed-door session for nearly two hours, three participants told Reuters.

    He rejected the assertion of some of them that Germany's highest court had ruled earlier this year that the ECB's Public Sector Purchase Program (PSPP) represented monetary financing of governments, the three said on condition of anonymity.

    His appearance at the session was part of efforts to defuse a constitutional crisis that had threatened to upend monetary policy in the 19-nation euro zone.

    Weidmann extended his defence to the ECB's latest bond-buying scheme, the Pandemic Emergency Purchase Programme (PEPP), saying that so far, he could not see an "obvious violation" of the ECB's rule to stay clear of monetary state financing, the sources added.

    But he added a note of caution by telling lawmakers that the effects and side effects of the bond purchases had to be constantly monitored and weighed up against each other, the sources said.

    More generally, Weidmann repeated his stance that the ECB should interpret its mandate rather narrowly to guarantee its independence as there was a risk of monetary policy getting politicised, the sources said.

    The Bundesbank declined to comment.

    Germany's top court ruled earlier this year that lawmakers failed to exercise appropriate control over the Bundesbank, which must quit the ECB's government bond purchase programme unless it could justify its participation.

    The early May ruling threatened to force the euro zone's biggest central bank to withdraw from a stimulus scheme credited with helping underpin growth before the coronavirus struck and averting a financial crisis amid the pandemic.

    Since that ruling, the ECB has sent a justification of its 2.3 trillion euro Public Sector Purchase Programme to the German government and parliament, which was accepted by Berlin.

    The Bundesbank has also agreed to participate in regular hearings billed as "monetary dialogue," modelled after similar meetings held for the ECB President by the European Parliament.

    The hearing also comes as the ECB faces a fresh legal challenge after lawmakers for the AfD party last month filed a complaint against the ECB's Pandemic Emergency Purchase Program (PEPP), claiming that the scheme exceeds the ECB's mandate.

    The 1.35 trillion PEPP was launched earlier this year at the height of the coronavirus crisis to keep borrowing costs down and prevent the pandemic from morphing into a sovereign debt crisis. (Reporting by Michael Nienaber and Balazs Koranyi; Editing by Hugh Lawson)

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