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ECB’s Weidmann says quantitative easing not out of the question

Jens Weidmann, member of the European Central Bank Governing Council

The European Central Bank could buy loans and other assets from banks to lift the euro zone economy, Germany’s Bundesbank has said, marking a radical softening of its stance on the contested policy.

The Bundesbank represents the euro zone’s biggest economy, Germany, and its president’s words carry weight in the debate over what the ECB should do as its traditional stimulus methods, such as lowering the cost of borrowing, run out of steam.

Jens Weidmann, who is a member of the European Central Bank Governing Council, called in an interview with MNI published on Tuesday for a debate about the effectiveness of other policy tools as the scope of further interest rates cuts was limited.

“The unconventional measures under consideration are largely uncharted territory. This means that we need a discussion about their effectiveness and also about their costs and side-effects,” Weidmann said in the interview, conducted on Friday.

“This does not mean that a QE programme is generally out of the question,” Weidmann said. “But we have to ensure that the prohibition of monetary financing is respected.”

Quantitative easing (QE) is when a central bank buys loans or other assets from banks and would represent a radical departure for the ECB, which has so far, not least under pressure from Germany, refused to make such a move.

Weidmann had been one of the chief opponents of such a move and his change of tack signals a possible future shift in the ECB’s stance, just at the time that the U.S. Federal Reserve is paring back its own programme of asset buying.

The ECB has kept interest rates at a record low of 0.25 percent since November and said it would keep rates at this level or lower well into the recovery and even if inflation begins to pick up to absorb a large degree of unused capacity.

The central bank has started to pay closer attention to the euro exchange rate and its impact on the outlook for inflation and Weidmann said a negative deposit rate could be a way to address the impact from 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,” Weidmann said. “But we are talking about hypothetical scenarios here and not about imminent decisions.”

Weidmann was referring to a negative deposit rate, which would mean that banks would have to pay to park their funds at the ECB overnight. The impact such a step would have to improve bank lending to companies and households was “debatable”.

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