Weidmann Not Against Sterilization Halt, Wary of Negative Rates

European Central Bank council member Jens Weidmann said he’s not against suspending the sterilization of historic bond purchases, while warning of the risks in lowering the bank’s deposit rate below zero.

“I wouldn’t rule out pausing sterilization” of purchases made under the now-defunct Securities Markets Program, Weidmann, who heads Germany’s Bundesbank, told Bloomberg News after a Group of 20 meeting in Sydney today. However, a negative deposit rate is “uncharted territory, so we don’t know what the reaction would be and what the effect is,” he said.

Economists are divided over whether the ECB will add to stimulus next month to counter the risk of deflation and take steps to ease market tensions. One option would be to stop weekly absorption operations, which remove liquidity injected by the SMP. ECB President Mario Draghi would only consider ending the sterilization if the Bundesbank openly backs him, two euro-area central bank officials familiar with the debate have said.

“If we’re discussing how to inject liquidity into the market, instead of creating a new instrument, the most straight-forward manner would certainly be just to either pause the absorption operation or reduce them in size,” Weidmann said today. “That would be, I think, the way that is connected to the least distortion, is easy to implement and so on.”

Ending the liquidity drain would add almost 180 billion euros ($247 billion) to the euro-area financial system at a time when officials are trying to curb volatility in money markets.

Interest Rates

Weidmann indicated he is less in favor of cutting interest rates further, with the ECB’s benchmark already at 0.25 percent and the deposit rate at zero. A negative deposit rate would mean banks paying the ECB to park excess cash with it overnight.

“We are now in a territory at the zero lower bound where all our measures are in a way unconventional, so we have to take into consideration that the side-effects might be also more pronounced than in a case where we discuss decreasing or increasing interest rates,” Weidmann said.

“We shouldn’t completely lose out of sight the effects on financial markets, which doesn’t mean that I want to relativize our primary goal of price stability. It means rather that I would argue for a longer time horizon in the sense that if we create a lot of volatility without having much of an effect on prices, that’s probably something we should consider,” he said.

Weidmann said German economic growth is helping to protect the euro area against the risk of deflation, which is “small.”

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