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