Germany's Bundesbank opens door to QE in Europe

Tue Mar 25, 2014 2:31pm EDT
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By Eva Taylor and John O'Donnell

FRANKFURT (Reuters) - The European Central Bank could buy loans and other assets from banks to help support the euro zone economy, Germany's Bundesbank said, 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 euro zone 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 euro zone 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 viewed critically.

"Of course any private or public assets that we might buy would have to meet certain quality standards," Weidmann, who is a member of the ECB's Governing Council, said in an interview with MNI published on Tuesday.

"But the overall question is one of effectiveness, costs and side-effects. We are currently discussing the effectiveness of these measures. The intended effects would then have to be weighed against the costs and side-effects."

ECB President Mario Draghi in Paris stressed the ECB's readiness to act should inflation come in below expectations.

For now, there was no need to act, Weidmann said, but if the outlook for inflation changed, for example as a result of a stronger euro exchange rate, the ECB could step in, most likely with another interest rate cut and possibly even QE.   Continued...

Jens Weidmann, President of Germany's federal reserve bank Bundesbank arrives for the bank's annual news conference in Frankfurt, March 13 2014. REUTERS/Kai Pfaffenbach