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German ministry advisers see risks in ECB's zero-interest policy
April 4, 2017 / 5:43 PM / 5 months ago

German ministry advisers see risks in ECB's zero-interest policy

European Central Bank (ECB) headquarters in Frankfurt, Germany, July 29, 2016.Ralph Orlowski

BERLIN (Reuters) - Academic advisers to Germany's economy ministry said the European Central Bank's zero-interest rate policy posed grave risks to the financial system.

In a report to be published Wednesday seen by Reuters, they also rejected calls for moves toward a cashless society, whose impact on illegal activity they concluded would be limited.

"The monetary policy pursued by the European Central Bank since 2014 is not commensurate with the risks," the experts wrote.

They said the policy was aimed exclusively at stimulating lending and economic growth by lowering interest rates, while disregarding the resulting burdens for the financial sector.

"The financial system sees interest rates of zero or less than zero as very problematic for various reasons," the advisers said in their report.

This policy - and the continuing growth of loans with too-low interest rates - have dampened profit margins in the sector and raised the risk that necessary reforms would not be carried out, it said.

"The longer the ...policy ...continues, the greater are the risks for the financial sector," the report said.

German officials have long been critical of the ECB's ultra-low interest rates but broader pressure for a tightening of policy has grown in recent months with inflation in the euro zone rebounding.

The report said that many financial institutions, including insurance companies, were having trouble generating any profits and covering their costs as a result of the ultra-low rates.

The council also opposed the idea of a cashless society, calls for which have been triggered by the development of new payments methods, efforts to halt illegal activities related to cash, and concerns about the impact of cash on monetary policy.

"The council views upper limits for cash payments very critically. There is a concern that such upper limits would mainly affect normal citizens and normal activities since shadow economies and criminals can easily evade surveillance or find alternate payment methods," the report said.

"...It would ... have a limited impact" on illegal activity.

German Finance Minister Wolfgang Schaeuble last year suggested limiting cash transactions of more than 5,000 euros to combat money laundering and the financing of terrorism, but the proposal ran into opposition across Germany.

ECB President Mario Draghi underscored the importance of cash as a form of payment during the rollout of a new 50 euro banknote.

He said three-quarters of euro zone payments were made in cash, and it remained essential for the economy.

The council of academic advisers provides guidance to the economy minister but its recommendations are not binding.

Reporting by Gernot Heller; Writing by Andrea Shalal; Editing by Jon Boyle and John Stonestreet

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