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UPDATE 1-Weidmann says not clear yet whether ECB will act in June -paper
May 21, 2014 / 5:40 PM / 3 years ago

UPDATE 1-Weidmann says not clear yet whether ECB will act in June -paper

* Weidmann says nothing has been decided yet

* If action needed, bank would turn to interest rates first

* Current debate more about deposit than refinancing rate

* Not in favour of targeted exchange rate policy

* “No need for government bond purchases” given low yields (Adds detail and further comments)

FRANKFURT, May 21 (Reuters) - It is not clear yet whether the European Central Bank will take fresh policy action at its upcoming June meeting, ECB Governing Council member Jens Weidmann has said.

Analysts in a Reuters poll expect the ECB to cut what little it has left of its main interest rate in June and push the deposit rate below zero in an attempt to stop the euro from rising and inflation from falling any further.

Weidmann told the Sueddeutsche Zeitung newspaper the ECB’s loose monetary policy stance was appropriate to support the recovery, but its risks and side effects should be kept in mind, according to advance excerpts of an interview due to appear in Thursday’s edition.

“The interest rate policy is the core of our monetary policy instruments. A central banker’s attention would certainly focus first on this, if in the end it became necessary to act,” Weidmann was quoted as saying. “But so far it is not clear whether we will have to act at all.”

ECB President Mario Draghi said after the May meeting that the Governing Council was “comfortable with acting next time” - its June 5 policy meeting - but wanted to see updated economic projections from the bank’s staff first.

Fresh policy action did not depend on current inflation rates, but on how prices developed over the medium term, Weidmann said, adding that there were no signs that the euro zone was in a deflationary downward spiral.

“Nothing has been decided yet,” Weidmann said.

NO NEED FOR GOVERNMENT DEBT PURCHASES

Citing ECB sources, Sueddeutsche Zeitung said the central bank was considering cutting the interest rate on deposits below its current level of zero to -0.1 percent, which would mean charging banks to park their cash at the ECB.

Weidmann said the current debate focused less on the main refinancing rate and more on the deposit rate. A negative deposit rate could revive the interbank money market, encourage lending to companies and affect the exchange rate.

The ECB has gotten increasingly concerned about the strength of the euro and its impact on already low euro zone inflation.

Weidmann called for a calmer debate, saying the euro-dollar exchange rate had several times in the past been at similar levels and on a trade-weighted basis, it was only just above the level seen at the beginning of the currency union.

“An expansionary monetary policy can certainly - as a side effect - lead to a weaker euro exchange rate. But I am not in favour of a targeted exchange rate policy to weaken the euro,” Weidmann, who also heads the Bundesbank, was quoted as saying.

Asked about government bond purchases by the ECB, Weidmann made clear that he had not changed his position recently, stressing that euro zone central banks were not allowed to finance governments and should interpret their mandate narrowly.

“In addition to that, there are now more than ever economic reasons not to buy government bonds,” Weidmann said, referring to government bond yields in some periphery euro zone countries falling to record lows in recent months.

“Why should the ECB intervene in these markets now and try to push the rates even lower?,” Weidmann asked. “The current market environment already has the effect of a government bond purchase programme.” (Reporting by Eva Taylor; Editing by Kevin Liffey/Ruth Pitchford)

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