UPDATE 1-Weidmann says ECB cut rates only after tough wrangling

Fri Jun 6, 2014 10:31am EDT

Related Topics

* Says Thursday's decision on new policy measures not easy

* Now we must wait and see how the measures take effect

* Would be absurd to talk of new ECB measures already (Adds quotes)

By Erik Kirschbaum

BERLIN, June 6 (Reuters) - European Central Bank Governing Council member Jens Weidmann said there had been tough wrangling within the ECB before the decision to ease monetary policy and he said it would be absurd to start discussing further measures already.

The ECB cut interest rates to record lows on Thursday, launched a series of measures to pump money into the sluggish euro zone economy, and pledged to do more if needed to fight off the risk of Japan-like deflation.

In an interview with Bild newspaper released on Friday, Weidmann, who heads Germany's Bundesbank, said the ECB had had to act because prolonged low inflation harms the economy.

"If the inflation rate is too low for too long, a development looms that could damage the economy and harm all of us," Weidmann said. "That's why we acted. We wrangled long and hard about the shape of the measures. It was certainly not an easy decision."

Weidmann said he would always work for price stability when asked why he appeared to be switching sides all of a sudden and backing a loosening of monetary policy.

"But that also means that the inflation rate should not be allowed to sink too low," he said.

"Yes, the central bank is making a lot of money available at low interest rates. But there is no flood of credit in the euro zone. On the contrary.

WEAK DEMAND

"Banks are very reserved as far as lending goes and demand for loans from companies is very weak in a number of countries. We did what we could to revive that. The decisive thing is that the economy in the euro zone gains some traction now."

Weidmann also said it would be wrong to start talking of another round of ECB moves so soon after Thursday's decisions.

"The ECB has acted with a very broad set of measures. Now we have to wait and see how the measures take effect. It would be absurd to already start talking now about a further set of measures."

Weidmann said that his position on the ECB's purchasing of government bonds had not changed.

"The ECB cannot be allowed to become the 'bad bank' of the euro zone and my position on buying government debt has not changed," he said.

Weidmann rejected suggestions that lower interest rates most benefit the struggling countries of southern Europe. Germany also benefits from the lower rates, he said. When asked how, he said:

"Secure jobs, because German companies can borrow money on extremely favourable terms. Affordable borrowing for homeowners and skilled craftsmen. And when the economies in southern Europe recover, that will also be good for German exports."

Weidmann said the ECB moves were aimed at promoting a swift economic recovery that would allow rates to rise again.

"The inflation rate in the euro zone is low and that protects consumers' purchasing power," he said. "At the same time the interest rates on savings accounts are very low. The ECB moves are ultimately aimed at making sure that is not a permanent situation. A quick recovery in the euro zone is important so that interest rates can rise again."

When asked when he thought interest rates would start rising again, Weidmann said: "As soon as we see in our forecasts that the phase of interest rates that are too low is ending, it will then be time to start raising interest rates." (Additonal reporting by Michelle Martin; Editing by Gareth Jones)

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