Following are excerpts from a CNBC interview with Julia Chatterley, and Jens Weidmann, President of Bundesbank.
JC: The Bundesbank has consistently warned against the impact of further stimulus, yet Mario Draghi, the president of the ECB, recently said that they ECB will not hesitate to act. Would acting now be a mistake?
JW: I think what Mario said is certainly right. If the ECB notices that price stability is not achieved in the medium term then it has to act. That's what he said and that's what we will consider in our March monetary policy meeting. But that is a completely different debate from the debate on further stimulus that is taking place at the G20 this week. My point was that we shouldn't paint the global economy too gloomy colours. I do think that the global gradual recovery is on track although the baseline is of course surrounded by more risk.
JC: Could we compare your stance today to your announcement after the stimulus was announced in December. Do you see more need for further stimulus today or less than December?
JW: I mean what is clear is that the oil prices of course affect the outlook for inflation and lead to a very substantial scale. But what is also true is that central banks have to look through oil price volatility as long as this doesn't trigger second round effects. I mean this is a short term influence on inflation rates and what we are concerned with is the medium term outlook for inflation, so we have to carefully watch whether there are any second round effects. We have to carefully analyse the effect of the current inflation rate on inflation expectations and from there we can judge whether there is a need to act.
JC: Well inflation expectations are suggest that there likely is a need to act. The markets pricing in a further 10 basis points of cuts for the deposit rate. What's the risk here that investors are disappointed once again?
JW: But that's a different point. For us what matters is inflation expectations and there you're right, market-based inflation indicators have decreased. And also you see that the survey-based inflation expectation measures have either risen with respect to consensus economics measure or have only slightly decreased with respect to the measure that the ECB gathers.
JC: we've seen a lot of volatility in financial markets in Europe. To what extent do you think they're attributable the ECB's extraordinary monetary policy.
JW: I think they can be traced back to a number of factors and one of course is the low interest rate environment. But the profits of banks is not a target for us. But of course the situation of banks and the stability of banks does matter for our transmission of monetary policy.
JC: But Constâncio said recently that they may have to look at mitigating the impact on banks. Are you saying that you disagree with that? Is a teared deposit rate system perhaps a solution here.
JW: I don't discuss specific measures. I don't anticipate the debate in the Governing Council but I would agree with Vítor in the sense that of course we have to look to what extent our measures produce counter-productive results that completely counter balance the intended effects that we want to produce.
JC: Do you think that the impact of negative deposit rates though played into the extreme sell-off that we saw in Deutsche Bank's assets in recent week?
JW: I wouldn't pin that down too much to one specific measure. I think what is clear is that the current low interest rates environment weighs on the profit outlook for banks and that has certainly been also in the current financial market volatility. But there are also a lot of other factors that contribute to this. I mean there is certainly also a certain regulatory uncertainty so it's key and very crucial that (12:56:24) is finished by the end of this year as we promised.
JC: Are you concerned about liquidity in the system. Particularly when we look at what happened as far as Deutsche Bank's cocoa bonds in particular, we got a situation now where governments choose what securities are bail-in-able, we have banks that decide at what point debt's converted to equity. Actually rather than having a more standardised system, we've got a more segmented system and that, on top of a lower liquidity level due to regulation. Actually it feels like the system is more dangerous now than it was before.
JW: Certain assets are perhaps more risky and that's to some extent also intended. We are moving from a bail-out regime to a bail-in regime. That means that some of the bonds that you have referred to, are now more risky because they can be bailed in, or it's more certain that they will be bailed in and that's why of course they reacted. That's also reaction that was intended and that contributes in the longer term to a safer financial system.
JC: So the reprising is just part and parcel. You have to get over it because this is the new format now.
JW: You have to dis-entangle multiple effects. There are certain country specific effects, there are certain bank specific effects and then there are those regulatory changes so we have to differentiate between these.
JC: One of the things that stabilises the market or seemed to was the suggestion that the ECB could perhaps buy bank assets. Can we rule that out at this stage?
JW: Well again, I don't want to anticipate any debate and I think it's certainly not wise to discuss single measures but I would think that it's kind of problematic if the institution that combines both a supervisory role and a monetary policy role becomes the largest creditor of the banking system that it is supervising. So in that sense, I think it raises a lot of issues. Also the question, which one do you buy how do you differentiate so it's market interference that is quite substantial.
JC: Do you worry about central banks here? I think investors are concerned actually that with the policies that central banks are now enacting, they're not part of the solution or not aiding the solution they're actually part of the problem now. What's the end game here? Are we talking helicopter money?
JW: My point is that you shouldn't over-burden central banks. They they don't have the miracles medicine at their disposal. We can in a sense influence prices, we can influence economic activity in the short-term but we cannot create growth. And my feeling is that time and again, central banks are at the spot and at the core of the hopes of many and I think we have to see their limited role and also their limited capacity to influence variables of interest to the broader public.
JC: So the message is, the ECB isn't a miracle worker and you're not a wizard?
JW: That summarises it quite well.