Bundesbank chief Jens Weidmann said the ECB is still able to take policy action to address the euro zone crisis even after cutting its main interest rate last week, a German newspaper reported on Thursday. The European Central Bank cut its benchmark rate to 0.5 percent last Thursday and its President Mario Draghi has since said it would monitor incoming data closely and be ready to cut rates further, including the deposit rate currently at zero.
Asked if the ECB had fired its last cartridge, Weidmann told the Westdeutsche Allgemeine Zeitung: "Monetary policy is still capable of action. There is no doubt that we must keep an eye on the risks of negative real interest rates." Weidmann, a staunch defender of the ECB's mandate to contain inflation, said the ECB was right to pursue a very expansive monetary policy given the weakened economic outlook in the euro zone and falling inflation.
But he warned: "It is important that the interest rate is quickly normalised when the situation improves. A low interest rate is certainly not a permanent solution." He reiterated his view that the effects of cutting the main refinancing rate "should not be overestimated at the moment". Weidmann, a member of the ECB's Governing Council, also said European countries should not ease up on reforms and questioned whether any stimulus packages to tackle high youth unemployment would create sustainable jobs.
Many of Europe's policymakers are starting to see unemployment as a crisis in its own right, rather than something that will resolve itself when the economy improves. Weidmann said only competitive companies and a healthy economy would offer young people long-term prospects. "A pause in reforms would therefore not be helpful." "In particular, now that we have stricter rules on reducing the deficit, we should not raise a question-mark over their credibility by exploiting their flexibility," he said.