German central bank president warns of low interest rates

There is a danger that euro area governments and the private sector may get accustomed to cheap money and refrain from furthering structural reforms, the German central bank president said in an interview published Friday. The risks and side effects associated with the accommodative monetary policy will increase over time, warned Jens Weidmann, President of Bundesbank and a governing council member of the European Central Bank (ECB) when interviewed with the German weekly Wirtschaftswoche. Traditional instruments, the chief banker argued, are less effective as the interest rate is staying at the zero boundary. With regard to negative deposit rate, a tool discussed by the European Central Bank (ECB) as a possible choice to step up lending to real economy, Weidmann cautioned that it is possible that banks will pass on the costs through higher interest rates to its customers and thus create an opposite effect. Weidmann sees no risks of the euro zone slipping into deflation. He admitted that the inflation will be low but still positive and added that the risk of deflation is very limited. The chief banker is sceptical of the possible fresh long-term lending by the ECB to stimulate the eurozone lending. Since the ECB has decided to meet the liquidity needs of banks with full allotment until mid-2015, the supply of liquidity should be enough, he maintained.