ECB must tighten screws as soon as justified

The European Central Bank (ECB) must not allow low interest rates and monetary stimulus to last indefinitely, the head of Germany's Bundesbank (central bank) said on Monday.

"Under no circumstances can interest rates remain so low for longer than is absolutely necessary with regard to price stability," Bundesbank president Jens Weidmann told a group of European newspapers including the Sueddeutsche Zeitung.

"The risks of ultra-loose monetary policy become larger the longer the phase of low interest rates lasts," he insisted.

The ECB's headline main refinancing rate has stood at zero since early 2016, while its deposit rate is in negative territory -- meaning banks pay to park their money in its coffers.

Combined with the central bank's offers of cheap loans to banks and "quantitative easing" policy of buying state and corporate debt, low rates are supposed to drive down the cost of borrowing for businesses and households, which should stimulate growth in the economy.

Stronger growth pushes up prices, nudging inflation towards the ECB's target of slightly below two percent.

But while the bank's governing council has pushed rates lower and increased the scale of its bond purchases to 80 billion euros ($89.3 billion) per month, growth in the 19-nation single currency bloc has remained sluggish.

The ECB slightly increased its growth forecast for 2016 to 1.7 percent at an early September meeting -- but trimmed its predictions for 2017 and 2018.

Meanwhile, groans from the banking sector have become louder as low interest rates cut into profits.

Weidmann dismissed fears that ending loose monetary policy could nip the economic recovery in the bud.

"Possible problems for individual financial institutions or government budgets mustn't stop us from normalising monetary policy as soon as it becomes necessary," he said.

Some governments including Italy and Germany have profited by refinancing their debts at negative rates, Weidmann noted -- an example he said shows "low interest rates are further sapping budgetary discipline."

"The mountains of debt will become a problem when rates rise again," he argued. "They may no longer be sustainable."

The Bundesbank chief in early August sharply criticised the European Commission's decision not to punish Spain and Portugal for exceeding budget deficit limits.

Source: AFP