FRANKFURT (MktNews) - The European Central Bank has not used up its rate-cut ammunition but is "obviously" not yet thinking about its next rate move, ECB Governing Council member and Bundesbank President Ernst Welteke said in an interview published Wednesday in the German daily Frankfurter Rundschau.
The ECB's 50 basis point rate cut Dec. 5 came at the right time and was the right size, Welteke said. "We do not comment in public about discussions in the ECB governing council. But I regard the timing and the size of the latest rate cut as justified", he said. Asked whether there was a level under which the minimum bid rate should not fall, Welteke said "such discussions have not taken place", according to the paper. The main reason the ECB had waited to cut rates was the availability on Dec. 5 of additional hard data pointing to a further deceleration in eurozone economic growth as well as a more favorable inflation outlook, Welteke said. Furthermore, the euro rose against the dollar in November, which would tend to dampen import prices, he said.
"In the current environment, I can live with an exchange rate (of the euro) of around parity with the dollar", Welteke said. However, Welteke stressed he sees no deflation risk in Germany. Whether the ECB's rate cut would boost the eurozone economy was yet unclear, Welteke said, However, the monetary policy easing "could not do any damage, either". "One can lead a horse to water but you can't make him drink," he repeated. Welteke clearly rejected the idea of handing over the task of formulating the inflation target to the European Parliament, since this were to limit the ECB's independence.
However, Welteke admitted that the inflation target of 2% could be discussed as it "may possibly be too ambitious". Welteke again stressed the importance of structural reforms, particularly in Germany, to boost eurozone growth. The German government's dilemma of a large budget deficit on the one hand and weak growth on the other -- thus making spending cuts nearly impossible -- this is not the fault of the Maastricht Treaty, since Germany should have reduced its deficit during earlier, more prosperous years, he said. "The argument that (budget) consolidation dampens growth cannot be proved", Welteke said.
Welteke also rejected the idea of selling part of the Bundesbank's gold reserves in a one-off effort to cut the German budget deficit. Instead, he would rather turn the gold reserves into a profitable activity so as to receive further income in the future. Welteke has previously mooted the idea of sell Bundesbank gold and buying German bonds or even stocks.