Germany's Merkel warns of risks to banks from low interest rates

DUESSELDORF, Germany (Reuters) - The European Central Bank’s ultra-low interest rates could worsen problems for already weak banks in Europe, German Chancellor Angela Merkel said on Wednesday, calling for a tightening of monetary policy.

German Chancellor Angela Merkel speaks at the annual meeting of the German Sparkasse savings banks in Duesseldorf, Germany, April 27, 2016. REUTERS/Wolfgang Rattay

The ECB unveiled a large stimulus package in March that included cutting its deposit rate deeper into negative territory and increasing asset buys, despite the objections of Germany, the largest economy in the euro zone.

The ECB stimulus prompted a fresh wave of criticism from German politicians who fear the ultra-easy monetary policy is eroding both the savings of thrifty citizens and also bank margins, putting the banking system at risk.

“The risks remain high. There are still too many weak banks in Europe and the low interest rates ... will tend to make this problem worse over the coming years,” Merkel said at an event in Duesseldorf for German savings banks.

ECB head Mario Draghi says the policy of printing money and keeping borrowing costs at rock bottom is working and that interest rates will stay at current record lows for a long time.

The ECB targets inflation of close to 2 percent over the medium-term but it is running at just below zero.

Merkel said politicians need to press for more structural reforms to help generate stronger growth and private investment, thereby freeing up central banks to pursue a tighter monetary policy.

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“Central banks, including the European Central Bank, are independent so I think politicians must focus on stimulating growth,” she said.

Last week Merkel defended German politicians’ right to criticize the ECB’s rate policy, saying this did not amount to interference in the bank’s independence.

Merkel said on Wednesday that European supervision of banks was paying off overall, but there was still room for improvement in terms of transparency and efficient decision-making structures.

Since late 2014 the ECB has been responsible for supervising the euro zone’s biggest banks.

Reporting by Andreas Kroener and Matthias Inverardi; Writing by Michelle Martin; Editing by Gareth Jones