July 6, 2017 / 4:17 PM / 2 months ago

Recovery gives ECB room to pare stimulus says Weidmann

Deutsche Bundesbank (German Federal Bank) President Jens Weidmann attends the ‘G20 Africa Partnership – Investing in a Common Future’ Summit in Berlin, Germany June 13, 2017.Axel Schmidt

FRANKFURT (Reuters) - Faster economic recovery in the euro zone is giving the European Central Bank room to pare back its extraordinary stimulus measures, Bundesbank President Jens Weidmann said on Thursday.

A long-time critic of the ECB's ultra-loose policy, Weidmann said that low borrowing costs are still needed, but the threat of deflation, the main justification for the ECB's 2.3 trillion euro bond buying scheme is now a distant one and growth is becoming broad based.

The comments suggest that Weidmann will continue to advocate a more hawkish stance, even after a small shift in the bank's tone last week pushed yields and the euro sharply higher, raising the risk that tighter financing would dampen growth.

"The ongoing economic recovery now raises the prospect of a monetary policy normalisation," Weidmann said.

"This is not about a full braking ... but taking our foot somewhat off the gas."

Minutes of the ECB's June interest rate meeting, published on Thursday, indicated that policymakers debated giving up their bias for even bigger asset buys but decided against the move, arguing that any change in the bank's language should be 'very gradual'.

ECB President Mario Draghi stirred markets last week when he said that better growth would in itself provide support to the economy so the ECB could tighten policy somewhat to keep the broad level of financial accommodation unchanged.

This fuelled speculation that policymakers could decide as early as September to reduce asset purchases from next year.

"The timing and rate of monetary policy normalisation depends on the extent to which price rises are sustainable and self-sustaining," Weidmann added.

He also argued that while growth is becoming increasingly robust, declining oil prices will be a drag on inflation and price growth could be 'somewhat' lower by the end of the year.

The ECB has fallen short of its inflation target of 2 percent for more than four years and projections show it will not reach its objective at least through 2019.

Reporting by Balazs Koranyi; editing by Alexander Smith

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