(Bloomberg) -- Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here.
Bundesbank President Jens Weidmann warned that a deteriorating economy shouldn’t spark “panic,” barely three weeks before the European Central Bank decides on further stimulus.
While Germany in particular was experiencing an economic slowdown, it was wrong to think monetary policy was the appropriate reaction, Weidmann said in an interview with Frankfurter Allgemeine Sonntagszeitung. A recession would require a fiscal response from the government, but there was currently no reason for a major economic stimulus, he said.
“We should neither end up with action for action’s sake, nor in pessimism,” said Weidmann, adding that Germany came from a long upswing with record employment. “I call for special caution with government bond purchases because they threaten to blur the line between monetary policy and fiscal policy.”
ECB Governing Council member Olli Rehn told the Wall Street Journal last week that it would be important to “come up with a significant and impactful policy package in September.” The governor of Finland’s central bank argued that when working with financial markets, it’s “often better to overshoot than undershoot.” Some banks expect the ECB to announce a rate cut, plus the resumption of quantitative easing and so-called tiering to reduce the cost of negative rates on bank deposits.
Germany’s central bank chief said that at some point interest rate cuts would no longer be effective.
“The lower the interest rates, the stronger the incentive to hold cash,” Weidmann told the newspaper. “However, we have not reached this point in my view.”
He also said there is “some leeway” for buying bonds, but cautioned against questioning the limits set by the ECB Governing Council.
To contact the reporter on this story: Alexander Kell in Frankfurt at firstname.lastname@example.org
To contact the editors responsible for this story: Lukas Strobl at email@example.com, Dylan Griffiths, Vernon Wessels
For more articles like this, please visit us at bloomberg.com
©2019 Bloomberg L.P.