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Keeping rates low for long makes exit harder: Weidmann
August 29, 2013 / 4:12 PM / 4 years ago

Keeping rates low for long makes exit harder: Weidmann

FRANKFURT (Reuters) - The longer interest rates stay low, the less effective monetary policy becomes and the more difficult it will be to withdraw support measures, European Central Bank Governing Council member Jens Weidmann said on Thursday.

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

The ECB said in July it would keep its interest rates at record lows for an “extended period” - its first use of forward guidance - and reiterated that guidance at its August 1 meeting.

This policy measure along with decisions to cut interest rates to a record low and provide banks with unlimited funding had been right in principle, said Weidmann, who is also the president of Germany’s Bundesbank.

“But the effectiveness of loose monetary policy decreases with the duration of the low interest rate period and the financial stability risks grow, the exit is getting more difficult,” Weidmann said in the text of a speech.

The Bank for International Settlements - known as “the central banks’ central bank” - had raised similar concerns in its annual report published in June.

Weidmann reiterated his opposition to the ECB government bond purchase program, called Outright Monetary Transactions (OMT), and said there should be a better balance between control and liability in the currency bloc.

It would not be helpful in this respect if aid from the euro zone rescue funds could be used retrospectively for direct bank recapitalization, as demanded by Greece or Ireland, he said.

Reporting by Jan Christoph Schwartz, writing by Eva Taylor; Editing by Ruth Pitchford

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