Jens Weidmann, the head of Germany’s central bank and a member of the European Central Bank’s Governing Council, said this week that the ECB is prepared to take further action to combat the slowdown of inflation.
In an interview with Italian daily II Sole 24-Ore, Weidmann said the ECB has anticipated a lower inflation outlook, and in response, cut interest rates and extended its full allotment policy until 2015.
“But be assured, we still have instruments at our disposal,” Weidmann said. “Thus, we are ready and able to act. But it is also true that some of these measures come with unintended side-effects which have to be weighed up by the Governing Council. What is more, price developments in some euro-area countries are driven by unavoidable adjustment processes to regain competitiveness. This should not be confused with deflation.”
Weidmann said weak credit growth in the euro zone is due to a number of factors beyond the bank’s control, including weak credit demand and constrained credit supply. He dismissed suggestions, however, that the ECB should intervene to develop programs aimed at expanding lending to small- and medium-size enterprises, as the U.K. did with its Funding for Lending program.
“The main impediment to lending is certainly not liquidity but the factors I just mentioned,” Weidmann said. “This holds for loans to SMEs as well as for other credit. Therefore it didn’t come as a surprise that much of the liquidity we provided through very long-term refinancing operations was not channeled to the real economy. Instead many banks used it to buy sovereign debt, especially in Italy and Spain. If liquidity provision is to be more effective in the sense of your question, we have to prevent such undesirable side-effects. However, as a matter of principle we should not try to fine-tune banks’ business decisions beyond this point.”
Weidmann said that in order to have a fiscally strong eurozone, Italy—the region’s third largest economy—must also be strong.
“Italy has embarked on some important reforms,” Weidmann said. “According to our assessment, Italy will leave recession by the end of the year. I am confident that with the right additional policy measures, in particular to reform the public sector including the justice system, to improve the flexibility of the labor market and to increase competition in the product markets, Italy can overcome the current crisis and will reach a sustainable growth path.”