ECB hasn't tied its hands with guidance, says Weidman

Thu Jul 11, 2013 5:29am EDT
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MUNICH (Reuters) - The European Central Bank has not "tied itself to the mast" with its use of forward guidance on low interest rates, and could raise them if inflationary pressures emerge in the future, ECB policymaker Jens Weidmann said on Thursday.

Abandoning its traditional policy of never pre-committing on future rates, the ECB said a week ago it would keep its interest rates at present or lower levels for an "extended period" - its first use of so-called forward guidance.

Markets are trying to assess how long this period could be.

The ECB offered some clarity in its monthly bulletin, also released on Thursday, saying forward guidance was consistent with, but not directly linked to, its decision in May to extend the full allotment liquidity policy until July 2014.

"The extended period of time over which the Governing Council currently expects the key ECB interest rates to remain at present or lower levels is a flexible horizon which does not pre-specify an end-date but is conditional on the Governing Council's assessment of the economic fundamentals that determine underlying inflation," it added in the bulletin.

In a speech in Munich Weidmann, a staunch defender of the ECB's mandate to contain inflation, also stressed that the ECB's monetary policy stance was conditional on economic developments.

He said the ECB's expectation that interest rates would remain at record lows for an extended period was justified by a subdued inflation outlook and a weak economic environment.

But he added that the ECB's policy move last week "is not a historic change in monetary policy communication" but simply an effort to give more guidance in a time of high uncertainty.

"It is not an absolute advanced commitment of the interest rate path," he said in the text of his speech. "The ECB Council has not, like Odysseus, simply tied itself to the mast."   Continued...

Germany's federal reserve Bundesbank President Jens Weidmann poses in front of the Bundesbank headquarters during a photo shoot with Reuters in Frankfurt May 17, 2013. REUTERS/Kai Pfaffenbach