European Central Bank Governing Council member Jens Weidmann said Tuesday that the ECB is ready to act in case of a prolonged period of low inflation but warned that the central bank’s remaining monetary policy measures mark uncharted territory and carry risks.
Speaking at a banking conference in Berlin, Weidmann said that deflation risks remained limited. He warned that the effectiveness of unconventional measures is uncertain and cautioned that the ECB should stay within its mandate.
“We are monitoring developments closely and are prepared for further measures to effectively counter a prolonged period of low inflation,” Weidmann said. “It should be taken into account that all the remaining monetary policy measures would mark uncharted territory. Therefore questions arise over the effectiveness of such measures and of their risks and side-effects.”
Weidmann said the ECB’s current accommodative monetary policy was appropriate given a subdued inflation outlook but also reiterated past warnings against keeping rates low for too long, arguing that the “risks increase with the length of low interest rate policy, while the positive, stimulating effects decrease.”
He rejected suggestions that a low interest rate policy for longer than needed for price stability could help make the debt picture in the Eurozone more sustainable, arguing this would mark fiscal dominance and “cannot be an option for us.”
On the financial system, Weidmann warned the Eurozone still faces significant deleveraging in spite of significant progress made over the last year.
“Especially periphery countries in the Eurozone still face significant adjustment,” Weidmann said, arguing the deleveraging pace should not to be slowed down.
On banking union, Weidmann said the Bundesbank welcomed agreement on a single resolution mechanism and resolution fund but stressed that treaty changes would still be needed.
“We still consider a change in primary law to be necessary, as the decision making processes remain complex,” Weidmann said. “The goal should be the creation of a European resolution authority with clear decision-making structures.”