WASHINGTON?UBS Group AG Chairman Axel Weber, the former president of Germany's Bundesbank, warned that central banks in Europe and Japan have reached the limits of monetary stimulus, weighing into an increasingly fractious debate in Germany over the European Central Bank's easy-money policies.
"We are now at a point?probably [where] the net benefits of further monetary easing, in particular in Europe but also in Japan, are outweighed by the costs and side effects," Mr. Weber said on the sidelines of the spring meetings of the International Monetary Fund and World Bank.
He warned that negative interest rates "are only possible for a very short time and in close proximity to zero," and said he doubts that the ECB's bond-purchase program will bolster economic growth and inflation.
The comments from one of Germany's top economists come amid mounting criticism in Germany of the ECB's â,¬1.5 trillion stimulus, which has been expanded aggressively since December.
Allies of Chancellor Angela Merkel over the weekend called for a German to succeed Mario Draghi as ECB president when his term ends in 2019. The ECB urgently needs "a change of direction, more German handwriting," Bavaria's finance minister Markus Soeder, a member of Ms. Merkel's Bavarian sister party, told Germany's Bild newspaper.
Mr. Weber was considered a lead contender in early 2011 for the ECB's top job, which has never been held by a German. Instead, he resigned amid a dispute over the ECB's bond purchases, leaving the field open for Mr. Draghi.
Many of the ECB's recent decisions have been strongly criticized in Germany, including the launch of its quantitative easing program last year. But the criticism has grown louder in recent weeks following its decision in March to launch sweeping rate cuts, additional bond purchases and cheap loans for banks. The ECB's deposit rate, charged for parking funds with the central bank, now stands at minus 0.4%.
Mr. Weber warned that the financial system wasn't designed to handle negative interest rates, and that such policies "can substantially change the behavior of consumers and savers" if they persist for a long period.
He also criticized the ECB's decision to pay banks to borrow under a new series of four-year loans for banks, due to be launched in June. The payment will be available if banks meet certain criteria on net lending to the economy.
"It is the subsidy that is not sensible," Mr. Weber said.
Top ECB officials, including Mr. Draghi, have stressed in recent days that they are ready to unleash even more stimulus if needed, including fresh rate cuts.
Those statements appear to have rankled Berlin. German Finance Minister Wolfgang Schä uble last week urged central banks to exit easy-money policies and argued that the ECB was partly to blame for the rise of a new anti-immigration party, the Alternative for Germany.
The global economic community has largely sided with the ECB. In a news release this weekend, Group of 20 finance ministers and central bank governors called on policy makers to use all available tools to bolster growth, including monetary policy. IMF chief Christine Lagarde said this month that subzero interest rates were "net positives" for the global economy.
Even Jens Weidmann, Mr. Weber's successor as Bundesbank president, has sprung to the ECB's defense, arguing in Washington on Friday that the central bank's policies are appropriate for the eurozone as a whole.
But banks, particularly in Germany, have complained loudly that subzero rates act as a tax because they can't easily be passed on to customers.
Mr. Weber said the scope for future rate cuts may be limited. Banks in Switzerland?which has introduced negative rates for some bank deposits?have increased the costs of loans to offset losses from negative rates, he said. Switzerland's deposit rate of minus 0.75% is "probably close to the limit of how negative interest rates can go without causing a run on cash," Mr. Weber said.
He also questioned the ability of the U.S. Federal Reserve to raise interest rates as other major central banks moved in the opposite direction.
"Since the Fed cannot completely uncouple [from other economies], it is likely that there is going to be a more cautious policy response in the United States, because otherwise there would be a stronger appreciation of the U.S. dollar," he said.
In the medium to long term, the Fed might risk falling behind the curve on rate increases, Mr. Weber said. But "at the moment there are no clear indications of that."
Write to Tom Fairless at [email protected]