European Central Bank Governing Council member Jens Weidmann said low interest rates come with risks that can’t be ignored, even though the current policy stance is appropriate.
“The expansive monetary policy is justified considering the outlook for price stability,” Weidmann, who heads Germany’s Bundesbank, said in a speech in Frankfurt today. At the same time, “one must not lose sight of the many challenges that come within an environment of low interest rates,” he said.
The ECB reduced its benchmark rate to a record low of 0.25 percent last week after inflation in the 17-nation euro region slowed to 0.7 percent in October, the lowest in four years. About one quarter of the 23-member Governing Council opposed the move, among them Weidmann and Germany’s representative on the ECB’s Executive Board, Joerg Asmussen, two central-bank officials said on Nov. 7
“It is important to make sure that negative real interest rates won’t become a permanent state and that monetary policy isn’t captive to politics or financial markets,” Weidmann said. “Ultra-loose interest-rate policy is no substitute for structural adjustment programs, which are necessary in some euro-area member states.”
While Weidmann said he sympathizes with German savers, whose return on deposits may fall further after last week’s rate cut, he argued that investors across the euro area are affected by lower interest rates.
“There’s no specific discrimination aimed at German savers,” Weidmann said. “Every saver, who wants to invest his money with low risk, has to live with low and negative real interest rates, for example also in Italy and Spain.”
Higher-yielding investments carry higher risks, he said, adding that “one should be aware that interest rates won’t stay at this level permanently.”