AMSTERDAM/FRANKFURT (Reuters) - European Central Bank policymaker Jens Weidmann called on Thursday for "patience" with bank monetary policy, warning that extraordinary stimulus loses its effect over time while increasing stability risk.
"All in all, the risks of ultra-loose monetary policy are becoming increasingly clear," he told a business forum in Amsterdam.
"It is important to give the measures taken enough time to have an impact on the inflation rate," he added.
"This focus on the medium term – alongside the fact that the euro area is still struggling to overcome the longer-term economic implications of the biggest economic shock since World War II – underscores the merits of patience."
The comments from Weidmann, who heads Germany's Bundesbank, come as the ECB contemplates whether to extend a 1.74 trillion-euro asset-buying scheme next month to boost growth and prop up inflation, which has missed the bank's 2 percent target for over three years running.
While sources close to the ECB's deliberations say some form of extension is almost certain, Weidmann pointed to a growing body of positive economic evidence that would justify a more subdued role for the bank.
"From a cyclical perspective at least, there is a ray of hope on the horizon," Weidmann said, arguing that the euro zone will grow faster than potential in the next few years.
"We shouldn't ignore the fact that, even with monetary policy rates unchanged, the increase in inflation rates automatically leads to lower short-term real interest rates and, therefore, to a further loosening of the monetary policy stance."
Ultra-low rates can fuel asset bubbles, cut bank profitability and encourage more government spending, all putting financial stability at risk, Weidmann said.
"Admittedly, bank profitability and the sustainability of life insurance and pension companies' business models is not a target of a monetary policy," said Weidmann, an ECB hawk who has often taken minority positions in key decisions.
"But monetary policy cannot afford to ignore these developments if banks’ health problems endanger the monetary transmission mechanism, or doubts about the stability of life insurance or pension companies prompt households to increase their precautionary savings."
Defending banks, Weidmann said new regulations known as Basel III should not lead to a significant rise in capital requirements and moving away from capital needs based on risk-weighting of assets was not appropriate.
(This version of the story corrects the 7th paragraph to show that above potential growth is seen for the coming years)
(Reporting by Balazs Koranyi and Francesco Canepa; editing by Andrew Roche)