ECB open to quantitative easing, says Bundesbank
JENS Weidmann, the head of Germany's Bundesbank, has said the European Central Bank could embark on a radical quantitative easing programme to boost the eurozone and ward off the threat of deflation.
The European Central Bank could buy loans and other assets from banks to help support the eurozone economy, the Bundesbank said, marking a radical softening of its stance on the contested policy.
The ECB has cut interest rates to a record low and promised to keep them low for some time, having also flooded the banking system with cheap crisis loans. But the eurozone economy is still weak and inflation remains stuck below the ECB's target.
As the search for alternative measures continues, Mr Weidmann entered the debate, saying the ECB could consider purchasing eurozone government bonds or top-rated private sector assets, opening the door to one of the ECB's most divisive policy options – quantitative easing (QE).
"Of course any private or public assets that we might buy would have to meet certain quality standards," Mr Weidmann said. "But the overall question is one of effectiveness, costs and side-effects. We are currently discussing the effectiveness of these measures. The intended effects would then have to be weighed against the costs and side effects," he said.
There was currently no need to act, Mr Weidmann stressed, but if the outlook for inflation changed, for example as a result of a stronger euro exchange rate, the ECB could step in to preserve price stability, most likely with another interest rate cut and as a so-far more theoretical option, QE.
Mr Weidmann's ECB Governing Council colleague, Jozef Makuch, who heads Slovakia's central bank, said deflation risks in the eurozone had risen and a number of ECB policymakers were prepared to take decisive steps if needed, also not ruling out QE.
"If circumstances show that it is needed to support adding liquidity, I do not have a reason not to support it, but I do not have a reason to pre-judge, because I do not know those circumstances," he told a news conference.
The euro fell broadly after Mr Weidmann's comments. The European Commission' vice-president for industry, Antonio Tajani, had said earlier yesterday that at $1.40 the euro was too strong.
The ECB has started to pay closer attention to the euro exchange rate and its impact on the outlook for inflation, and Mr Weidmann said a negative deposit rate could be a way to address the impact from a strengthening currency.