May 15, 2014 / 1:55 PM / 6 years ago

German finance minister contradicts IMF chief on monetary policy

BERLIN (Reuters) - German Finance Minister Wolfgang Schaeuble pointed out the risks of accommodative monetary policy on Thursday, differing with his “really good friend” Christine Lagarde of the International Monetary Fund who has called for more stimulus from the ECB.

Germany's Finance Minister Wolfgang Schaeuble makes remarks during a news conference during the IMF and World Bank 2014 Annual Spring Meetings in Washington, April 12, 2014. REUTERS/Mike Theiler

The IMF’s managing director has repeatedly called for action from the European Central Bank to keep at bay the risk of persistently low inflation in the euro zone.

Lagarde told German newspaper Handelsblatt on Monday that the euro zone crisis was not over yet as credit flows were still hampered and the difference in funding conditions for companies across euro zone members still varied.

On top of that, continuously low inflation brings additional risks, Lagarde said, adding that European monetary policy should therefore provide further growth stimulus.

Schaeuble chose a business conference in Berlin on Thursday for a polite but critical response.

“Many people think an accommodative monetary policy is the solution for all problems,” said the minister, a close ally of Chancellor Angela Merkel, adding that he saw no risk of deflation in the euro zone.

“My friend Christine Lagarde, whom I really like a lot and who is great, manages to give two interviews on one day, saying first we should return to a solid fiscal policy and structural reforms, and second that the ECB must increase its accommodative monetary policy further.”

“And I say: Christine, what do you mean - one thing or the other?” he said, adding that any accommodative policy should be limited in time because otherwise pressure on governments for structural reforms would weaken.

“Monetary policy can be accommodative for a period of time, but it cannot solve the structural problems,” said Schaeuble, adding that there were “risks and side-effects” such as the pressure on emerging economies in bonds markets.

Interest rates in general should rise to just above inflation sooner or later, he said: “I believe that in the medium term we should reach a more reasonable interest rate level, a level that is adequate to (deal with) the risks but slightly above the inflation rate.”

“There is no other way for us than trying to reduce the excess of liquidity,” Schaeuble said of his stance on monetary policy, adding that the topic reminded him of his time as German interior minister trying to combat drug abuse.

“In the short term, you will always have problems when you go on withdrawal. But if you don’t do it, you will have an even bigger problem in the medium term,” he said.

That is the “difficult task” facing the U.S. Federal Reserve and ECB right now, Schaeuble said, adding: “And the ECB is doing a really great job, it’s not for me to criticize them.”

Editing by Madeline Chambers and Robin Pomeroy

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