ECB warns about loose monetary policy

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ECB Reuters. The Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt.

Madrid - European Central Bank policymaker Jens Weidmann said on Friday that loose monetary policy had “done its bit” to maintain price stability in the euro zone, but cited a litany of long-term dangers from easy money.

The ECB cut rates to record lows last month as part of a package of measures to breathe life into a sluggish euro zone economy, where inflation is running far below the central bank's target and there is a dearth of credit to smaller firms.

The hawkish Weidmann, whose role as Bundesbank president gives him a seat on the ECB's policymaking Governing Council, said it was essential to prevent an excessively long period of low inflation as that “could paralyse the euro area's economy.”

But he added that the ECB's monetary policy could not resolve the euro zone debt crisis.

“In the long term, the ultra-loose monetary policy poses risks to financial stability,” Weidmann said with reference to the policy decisions announced by the ECB in June.

“There is a danger of exaggerations on the asset and real estate markets - just think of the hunt for yield,” he added in the text of a speech entitled, 'Towards a more stable European monetary union', for delivery at the Madrid stock exchange.

“Low interest rates also ease the pressure on governments to vigorously tackle their countries' problems,” he said.

“There is a danger that the low interest rates will be used not to consolidate budgets, but to finance additional spending.”

Pressing governments to respect European budget rules and keep up economic reforms, he said an excessively generous interpretation of leeway in fiscal rules enshrined in Europe's Stability and Growth Pact would undermine its credibility.

Weidmann's comments came against the backdrop of a debate among euro zone policymakers about the flexibility of their fiscal rules, with Italian Prime Minister Matteo Renzi leading calls to move from austerity to expansion.

The Bundesbank chief said the Eurosystem of euro zone central banks - the ECB and its stakeholders - must not give governments an easy ride by leaving interest rates lower than necessary to deliver stable prices.

“So it is particularly important to make it quite clear now that the Eurosystem will not put off a necessary increase in central bank interest rates out of consideration for public finances,” Weidmann said.

“Looking at the euro area, I would therefore say that monetary policy has done its bit towards maintaining price stability,” he added. “Finally, monetary policy must not allow itself to be misappropriated for fiscal policy purposes.” - Reuters


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