ECB must not keep policy ultra-loose for too long, Weidmann says

FRANKFURT (Reuters) - The European Central Bank must not keep an ultra-loose monetary policy for too long or it may struggle then to wind it down, ECB governing council member and German central bank governor Jens Weidmann said on Wednesday.

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The head of the Bundesbank reaffirmed his support for the ECB’s present stance and defended the bank’s independence.

But he warned about the risk associated with keeping the ECB’s ultra-low rates and money-printing programme going for too long and defended Germany’s conservative fiscal policy against accusations that it was slowing down the European economy

“An expansionary monetary policy stance is justified for now,” Weidmann said at an event in Frankfurt. “But we must not over-extend the period of ultra-loose monetary policy, because various risks and side effects are part and parcel of the current policy stance.

“The longer a central bank pursues an ultra-loose monetary policy ... the greater the risk that a slight tightening of policy, or even expectations of a slight tightening of policy, will send market interest rates sharply higher,” he said.

Having opposed the ECB’s easy monetary policy for years, Weidmann stood up for the institution when it was attacked by German finance minister Wolfgang Schaeuble last month.

The head of the Bundesbank reiterated that defence on Wednesday, saying central banks should avoid being taken hostage by financial markets or fiscal policies.

German Chancellor Angela Merkel also took some pressure off the central bank on Wednesday, saying it was up to euro zone governments to foster the growth necessary to lift inflation and allow the ECB to raise rates.

But in a nod to his domestic audience, Weidmann dismissed an argument that excessive savings and insufficient investment in Germany were slowing down the ECB’s recovery.

“Should more funds be invested in Germany? That’s something I would wholeheartedly welcome, but the disclaimer remains the same: The funds should only be invested in sensible projects,” Weidmann said.

He also defended the German government against criticism that it was spending too little and focussing too narrowly on maintaining a surplus.

“While I would not deny that there is scope for some more public investment in infrastructure or education, it is worth noting that fiscal policy in Germany is already in expansionary mode due to the cost of accommodating the refugees,” Weidmann said.

“The long-term sustainability of public finances calls instead for Germany, with its demographic burden, to run a structural surplus.”

Reporting By Francesco Canepa, editing by Larry King and Hugh Lawson