European Central Bank Governing Council member Jens Weidmann put euro-zone countries on notice, saying the ECB won't let considerations about public finances keep it from raising interest rates when this becomes necessary. The comments reflect concerns that euro-zone countries will use record low interest rates as an excuse to finance new spending, rather than reinforce budget discipline.
"There is a danger that the low interest rates will be used not to consolidate budgets, but to finance additional spending," said Mr. Weidmann in remarks prepared for delivery Friday in Madrid. "This is why the Governing Council so insistently calls for sound public finances as a prerequisite for a stability-oriented monetary policy."
Mr. Weidmann said it is therefore "particularly important to make it quite clear now that the Eurosystem will not put off a necessary increase in central bank interest rates out of consideration for public finances."
"Looking at the euro area, I would therefore say that monetary policy has done its bit towards maintaining price stability," he said, suggesting that he thinks the ECB should hold off on additional accommodative measures.
Mr. Weidmann leads Germany's Bundesbank, considered by some to be the most hawkish institution of the national central banks in the euro zone. Central bankers from the 18 countries that use the euro, plus six members of the Frankfurt-based Executive Board form the ECB's Governing Council, which sets monetary policy in the currency bloc.
Even amid Mr. Weidmann's strong words, experts say the ECB is at least two years away from raising rates. The ECB agreed in June on a comprehensive package of measures designed to pump up inflation in the euro zone and revive bank lending in the region. The measures included cutting all interest rates, including introducing a negative interest rate on deposits at the central bank, and introducing new longer-term loans to banks, with the aim of encouraging them to pass funds on to the real economy.
Mr. Weidmann signaled that those measures can't be compared with earlier ECB programs, which involved purchases of government bonds, which he opposed. "The comprehensive measures agreed by the Governing Council of the ECB in June cannot, in my opinion, be compared with the crisis measures taken two or three years ago."
He said the current measures don't involve the liability risks of individual countries being transferred onto the central bank's balance sheet. "The task now is to prevent an excessively long period of low inflation. Because that could paralyze the euro area's economy," he said.
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(END) Dow Jones Newswires
July 18, 2014 07:15 ET (11:15 GMT)
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