Germany's Merkel sees drawback from low ECB rates

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German Chancellor Angela Merkel on Thursday waded into the debate on whether the European Central Bank should cut its key interest rates by noting that there were drawbacks to keeping rates perennially low.

"We also see that there's a negative to low interest rates, for insurance customers and savers," Merkel told a banking conference in Dresden.

"The ECB has the difficult task of setting an interest rate that meets the needs of all countries," she said.

"This means on the one hand the lowest possible interest rates for EU crisis countries so that they have access to the urgently needed liquidity. On the other hand, Germany would need a higher interest rate because savings are currently losing value," Merkel said.

Pressure has increased on the ECB recently to give the flailing eurozone economy a boost by cutting its key interest rate, already at an all-time low of 0.75 percent.

The case for such a move appeared to be strengthened Wednesday when data showed that business confidence in Germany, which has managed to escape relatively unscathed from the recession plaguing most of its neighbours, has taken a severe knock.

The ECB's policy-setting governing council is scheduled to hold its next meeting in Bratislava next week and a possible rate cut was discussed at the last meeting.

However, ECB executive board member Joerg Asmussen appeared to play down such hopes earlier by arguing that such a move should not be seen as a cure-all for the region's debt crisis.

"Monetary policy is not an all-purpose weapon for any kind of economic illness," Asmussen told a conference in London.

Asmussen argued that the countries that would benefit most from even lower rates would not necessarily feel the effect of additional monetary easing.

"Due to impaired monetary policy transmission, the pass-through of rate cuts to the periphery would be limited, and this is where they are most needed," Asmussen argued.

"At the same time, rate cuts would further relax already unprecedentedly easy financing conditions in the core. This is not per se a problem -- but interest rates that are too low for too long can eventually lead to distortions," the ECB official argued.

Excessively low interest rates could lead to a misallocation of resources, excessive capital inflows into a number of emerging economies with exchange rate effects and credit risks, and it would reduce incentives for governments, banks, and corporates to adjust, Asmussen said.

"These costs of very low interest rates are real, and they rise over time. Of course, these costs have to be weighed against the need for exceptional monetary policy measures in a crisis," Asmussen continued.

He insisted there were limits to what monetary policy could achieve.

"The ECB can and has addressed bank funding problems," via pumping unprecedented amounts of liquidity into the system via its so-called LTROs, or long term refinancing operations, Asmussen said.

But the money does not appear to be finding its way through the system into credit to companies and business.

"There are other barriers holding back bank lending, like heightened risk aversion, a lack of loan demand and insufficient capital. And above all, bank lending will only fully come back when the bank balance sheet repair is completed in all member states," Asmussen said.

"The ECB cannot remove these constraints. This is where our responsibility ends and that of governments or other EU institutions begins," Asmussen said.


© 2013 AFP

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