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MNI POLICY: ECB Should Guard Against Bubbles - Weidmann

By Luke Heighton
     FRANKFURT (MNI) - The European Central Bank should not be "overconfident"
in assessing the ability of macroprudential policy to compensate for the
negative effects of expansionary monetary policy, the president of Germany's
Bundesbank said Friday.
     "Monetary policy cannot be complacent if its policy stance raises long-term
risks to price stability through the build-up of financial imbalances," Jens
Weidmann warned.
     A prolonged period of low interest rates could induce investors to take on
undue risks, sowing the seeds of financial imbalances and potentially
undercutting the ECB's ability to maintain price stability, he said.
     "Clearly," Weidmann said, "the first line of defence against financial
imbalances should be macroprudential policy. But this policy approach is still
in its infancy, and our knowledge about the effects and transmission channels is
incomplete."
     Weidmann said price pressures in the euro area remain subdued, and that
while monetary policy accommodation was still warranted, the side effects of
such policies are increasing.
     "The longer the period of negative rates persists, the more likely it is to
place a burden on banks that primarily generate their income from traditional
deposit-taking and lending operations," Weidmann said. "The relief which the new
tiering system will provide to banks is likely to be perceptible, but modest.
     "The pressure on bank profitability arising from negative interest rates
could eventually cause banks to cut back on lending despite additional
expansionary monetary policy measures, thereby impairing the transmission of
monetary policy," he added.
     Germany's economy has avoided slipping into a technical recession, and
Weidmann said first tentative signs emerged that the downturn in its
export-oriented industrial sector could level off, while wage pressure pointed
"in the right direction."
--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com
--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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