The European Central Bank could buy loans and other assets from banks to help support the eurozone economy, Germany’s Bundesbank said Tuesday, 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 well below the central bank’s target.
With the debate over possible alternative measures picking up pace, Bundesbank President Jens Weidmann said the ECB could consider purchasing eurozone government bonds, or top-rated private sector assets.
That opened the door to one of the most divisive policy options – quantitative easing (QE) – and one that the German central bank has consistently criticised.
The ECB has started to pay closer attention to the euro exchange rate and its impact on the outlook for inflation. Weidmann said a negative deposit rate could be a way to address the impact of a strengthening currency.
“If you wanted to counter the consequences of a strong appreciation of the euro for the inflation outlook, negative rates would, however, appear to be a more appropriate measure than others,” he said. “But we are talking about hypothetical scenarios here and not about imminent decisions.”
The Bundesbank represents the 18-member eurozone’s biggest economy, Germany, and its president’s words carry weight in the debate over what the ECB should do as traditional tools such as changing borrowing costs lose their force.
Weidmann cited limits under the ECB’s mandate on funding governments, which a pending German constitutional court ruling on the legality of the Outright Monetary Transactions (OMT) bond purchase programme is expected to underline.
“This does not mean that a QE programme is generally out of the question. But we have to ensure that the prohibition of monetary financing is respected,” Weidmann said.
“We need to discuss this and ideally achieve a common view.”
The ECB’s Liikanen and Makuch also did not rule out QE.
Full article: Germany’s Bundesbank opens up to Quantitative Easing (EURActiv)