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Bundesbank President Dismisses Deflation, Increases Tension At ECB

AIA Group Chairman, Shawn Baldwin, meeting with Jens Weidmann, Deutsche Bundesbank President, at the IMF Meetings in Washington, DC

(Frankfurt, Germany) On Wednesday in Frankfurt, Jens Weidmann, President of the Bundesbank, Germany’s central bank, indicated that his country’s economy―Europe’s largest―is doing just fine, and that he believes the overall shape of the euro area isn't as bad off, even as the inflation outlook worsens. Still, in other statements, given his hawkish position as a Governing Council member of the European Central Bank (ECB), he warned that further stimulus could weaken the transmission of policy to the economy.

Speaking at the Bundesbank annual news conference, Weidmann stated, "what matters for us is that we don’t produce counterproductive effects," on the eve of the ECB meetings on March 9-10. During those meetings, policy makers will be taking a closer look at the current package of negative interest rates and a 1.5 trillion-euro ($1.7 trillion) bond-buying program in the face of a deteriorating inflation outlook. With rates currently at minus 0.3%, any further cuts will cause banks to curtail lending given diminished profits, which, of course, will harm growth prospects for the region, already feeling the impact of the slowdown in China.

Speaking of inflation in the euro area, which was 0.4 percent in January, far below the near 2% goal of policy makers, there are talks it could enter into negative territory in the near-term. In light of this, however, Weidmann, is on record as being reluctant to increase stimulus, favoring a thorough debate of the proper monetary policy and the tools to be used before taking further, drastic measures.

Weidmann went on to say at the press conference, "the ECB should be looking for growth stimulus through higher interest rates," and he added, "rather than financial restraints."

The Bundesbank head commented that low energy prices as well as spending related to the refugee crisis are positively impacting the German economy. Weidmann believes the people who are coming to Germany due to the crisis will cause growth, as measured by output, to potentially rise to 0.25% this year and next.

Weidmann also drew attention to Germany’s record high employment in 2015 and falling unemployment, which is "leading to a distinct rise in real disposable income," he is quoted as saying before news reporters.

While the purpose of next month’s meetings are to achieve higher growth levels, given the current low inflation rate, Weidmann warned that any further actions by the ECB "could entail longer-term risks and side-effects." The Bundesbank president believes these challenges would be too dangerous to simply ignore.

Whatever actions are taken by the ECB, arguments from both sides must be looked at carefully, because the long-term consequences may be irreversible.