MNI POLICY: Weidmann Calls For ECB To Slim Balance Sheet

By Luke Heighton

     FRANKFURT (MNI) - The European Central Bank should reduce the size of its

balance sheet, the President of the German Bundesbank said Friday, as he

insisted there was no reason to depart from the path towards a pre-crisis

monetary policy framework.

     Jens Weidmann said policymakers could resort to "some tinkering with the

operational framework," but that a lean balance sheet would help the Eurosystem

to "retain or regain sufficient policy space for cases of future need."

     Here are key points from his speech in Frankfurt:

     -- The ECB's asset purchase program reduced the amount of safe assets in

the hands of the non-bank private sector, created large quantities of excess

liquidity, and contributed to persistently weak interbank market activity.

     -- Ultra-expansionary monetary policy compressed long-term interest rates

for a prolonged period of time, which may also feed into natural rate estimates.

A Bundesbank analysis has stressed that those natural rate estimates are highly

uncertain.

     -- Monetary policy may have to adapt to new economic and financial market

conditions, digitalisation, or changes in the regulatory framework. However, "I

am not convinced that monetary policy should routinely respond to changes in the

environment by intervening in a growing number of market segments," Weidmann

said.

     -- Weidmann said he "would not consider the provision of safe assets a task

for monetary policy," rather: "It is up to governments to make sovereign bonds

safe assets again, especially by reducing the heavy burden of public debt in the

euro area [...] In a monetary union with independent national fiscal policies, a

clear separation between monetary and fiscal policy is particularly important."

     -- Sovereign bond purchases are "if rightly designed, a legitimate

instrument, but in the specific context of the euro area an instrument which

should only be used in exceptional cases to fend off a deflationary spiral."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: M$E$$$,M$X$$$,M$$EC$]