FRANKFURT (Reuters) – The impact of low interest rates wanes over time and they cannot become permanent, European Central Bank Governing Council member Jens Weidmann said on Wednesday.
Weidmann, who also heads the German Bundesbank, said that the ECB’s Governing Council sees no deflation risks.
“Risks and side effects increase especially when the medication of low interest rates becomes permanent therapy, while the impact of low interest rates decreases the longer they last,” Weidmann said at an event organized by German co-operative banks.
The Bundesbank head also warned governments against relying too much on lower funding costs created by very low policy rates.
“Government must not lean back and just rely on the effectiveness of low interest rates,” he said. “This is the risk of expansive monetary policy, that we will have to keep an eye on.”
Weidmann also said that the ECB’s bank balance-sheet assessment would look at whether banks have problems when interest rates start to rise, as rising interest rates hit banks earlier than the real economy.
(Reporting by Sakari Suoninen and Eva Taylor)