German savings banks warn ECB on monetary ‘activism’

Hortense Goulard writes: Two days ahead of a key meeting of the European Central Bank, the chief economists of the German Savings Banks Association warned Tuesday that more expansionary monetary policy from the ECB “would barely have a positive impact on the economy” but could create problems in the long run.

“With hasty monetary policy, the ECB mainly achieves a crisis atmosphere and fosters a lack of trust in the eurozone,” economists from the association (Deutscher Sparkassen und Giroverband) stated in a press release. Most analysts expect Mario Draghi and the ECB board to take the Bank’s interest rates deeper into negative territory on Thursday.

Further lowering of key interest rates would harm financial stability, because of new risks and “huge side effects for the banks and the financial markets,” said Gertrud Traud, chief economist at the Landesbank Hessen-Thüringen.

The ECB instead should drop its goal of achieving an inflation rate close to 2 percent, according to the association’s economists.

“In a time of marked economic weakness as today, this goal is difficult to reach anyway,” said Michael Wolgast, chief economist of the DSGV, adding that the credibility of the central bank could be damaged if it kept missing its inflation goal in spite of its monetary measures.

Contrary to the ECB, the DSGV chief economists see little danger of deflation in the eurozone. They believe the inflation rates “should be near the goal of 2 percent in 2018 at the latest” without any additional monetary measures.