MILAN, Dec 8 (Reuters) - The European Central Bank has the tools to counter an excessive slowdown in inflation and would act if necessary, but some carry unwanted consequences, Governing Council member Jens Weidmann told an Italian paper on Sunday.
The ECB has signalled its readiness to act against the threat of falling prices but has yet to come up with a detailed plan of which policy tools to use and when.
'I don't want to speculate about future monetary policy moves. But, rest assured, we still have other tools at our disposal. We are ready and able to act,' the head of Germany's Bundesbank was quoted as saying in Il Sole 24 Ore.
'It is also true that some of these measures carry unwanted collateral effects that the council must ponder.'
The ECB left its key interest rate at 0.25 percent last week but its president, Mario Draghi, said the central bank was ready to take fresh policy action though it had yet to decide which tool to use in which situation.
In the run-up to the meeting, several policymakers flagged the ECB's readiness to ease policy further, if needed, with unconventional instruments, such as asset purchases or a negative rate on banks' overnight deposits at the ECB.
Weidmann said the latter was a possibility but evidence was controversial. Banks could pass on the cost to clients by charging more for loans.
'In this case we would achieve the opposite effect than initially intended,' he said.
Buying government bonds was problematic because of European Union rules that ban monetary financing of public debt and also because it implies a sharing of sovereign risks among countries that could only stem from a political decision, he said.
Weidmann said that banks' weak balance sheets and high credit risks curbed lending. However, abolising rules that assign zero risk to government bonds among bank assets would help credit to the private sector.
The ECB sees inflation running well below its target of nearly 2 percent over the next two years, forecasts released last week showed.
Weidmann said that prices in some countries were influenced by a rebalancing needed to regain competitiveness and this must not be confused with deflation. On the contrary, German inflation was slightly above the euro zone's average because the economy was producing nearly at full capacity.
He said the coalition deal agreed in Germany between centre-left Social Democrats and Chancellor Angela Merkel's conservatives contained some elements that risked weakening the sustainability of the pension system and reducing flexibility in the labour market.
The designated German coalition partners have decided to use surplusses in the social security system to raise senior citizens' income. The Bundesbank had already warned that this is not sustainable due to the demographic development in Germany.
(Reporting by Valentina Za, additional reporting by Scot Stevenson in Berlin, Editing by Angus MacSwan) Keywords: ECB WEIDMANN/PAPER
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