Interview with Ardo Hansson, Governor of Eesti Pank and Member of the Governing Council of the ECB, and news agency MNI, was conducted on 21 May 2014.
European Central Bank Governing Council member Ardo Hansson has signalled a preference for negative interest rates on the Bank’s deposit facility should the Eurotower decide to ease borrowing costs further to address inflation concerns in the currency area.
Speaking exclusively with MNI as the Governing Council gathered for its mid-month meeting in Frankfurt this week, Hansson, however, would not pre-commit to easing measures in June and raised questions over the effectiveness of non-standard measures aimed at kick-starting credit to the real economy.
“Personally, I see a lot of attraction in keeping a certain width of the corridor. Certainly if you do keep that corridor it is a more powerful instrument than if you were to narrow it,” Hansson, who heads the Estonian central bank said while underlining the importance of nurturing the recent normalization of money markets. “If the corridor becomes too narrow, then you drive banks towards the Eurosystem again.”
“Negative interest rates are not completely uncharted territory as some of the smaller countries have done this. The fact that it has been tried elsewhere makes you a bit more comfortable but for us it is still going into new territory,” Hansson added. “It has been said enough times that there is technical readiness to do this.”
However, Hansson would not pre-commit to any action in June and cautioned against taking a one-sided view of the euro’s strength on the inflation profile.
“You cannot look at one side of the equation alone and say the euro is strengthening therefore it is uniformly negative for our medium-term price stability. It is an exogenous shock with money flowing in from abroad which is at the same time easing monetary conditions by lowering the market interest rates,” Hansson said. “The combined effect is important to keep in mind.”
While ECB staff forecasts in June are “a very important input” Hansson also said that there would not be a “mechanical” reaction to potential downward revisions of the inflation outlook. “Everyone can have a view to whether their own assumptions are more or less optimistic than what the staff has.”
ECB President Mario Draghi during his regular May press conference said that the “Governing Council is comfortable with acting next time but before, we want to see the staff projections that we come out with in early June.”
Bundesbank President Jens Weidmann in an interview with German press earlier this week underlined that “it is not yet clear that we will have to act all.”
“If it looks like this period of low inflation kind of becomes more protracted then obviously the level of concern becomes higher,” Hansson said. “Certainly, to the extent that it is weaker towards the medium term it strengthens the case for doing something.”
Hansson also took a sceptical view on central bank measures to kick-start lending to the real economy via targeted liquidity operations
“It is not that there is necessarily this huge latent demand out there that somehow needs to be unlocked. If we talk about an output gap – a persistent one that will last for several years – the corollary has to be that there is spare capacity which then means that many companies would say that there is no need to invest if I have spare capacity. This is totally understandable,” he said.
“In some sense this sluggish growth of credit or the slight decline in credit to the extent that it is a rational response of either banks or enterprises to their current situation both balance sheet and level of demand then any attempted measures would be more like pushing water uphill. In this setting, you have to at least ask how effective it is going to be,” he added.
Designing such an operation that would ensure banks do pass on funds to the real economy would be a big challenge as well, Hansson said: “You want to make sure that you can somehow define a measure that cannot be gamed or evaded so much.”
At the same time, it must not encourage banks to delay the writing off or provisioning of bad loans, he argued.
“You could imagine if somebody said the price you get is somehow dependent on your net expansion of credit and then every time you write off your net credit provision becomes smaller then banks might say I would love to write it off but it is a financial penalty for me.”
“I think the challenge of getting this credit channel more active is actually rather high. So I think here there are real questions of possible effectiveness and operational design issues,” Hansson stressed.
At the current juncture, Hansson sees no need for unconditional liquidity operations but said that the ECB continues to monitor developments on money markets and is ready to inject additional liquidity if needed.
Hansson cautioned that the recent market developments may have further complicated possible asset purchases by the Eurotower. “I think in several jurisdictions you have these tensions between still sluggish recovery and very booming asset markets. I think this concern is something that you have to factor in,” he said. In particular, Hansson said that the “this turnaround in the bond markets in stressed countries has been rather high.”
“The more you see this bullishness in asset markets, the bigger the risks that this would lead to misallocation of credit so that the quality of credit starts declining.” While macro-prudential tools “in principle” may be a way to address such risks, Hansson cautioned that these “are rather new and untested.”
Nevertheless, Hansson said that technical work on possible asset purchases – both of private and public sector assets – is ongoing. Questioned about recent suggestions by the Bruegel institute that the ECB should consider buying up bonds from the European Financial Stability Facility and European Stability Mechanism bailout funds as well as from the European Investment Bank, Hansson said he thinks “this is narrowing in on specifics somewhat quickly.”
“The staff could first look at mapping out the entire universe of tradable securities and having a view of what is out there and then honing in on what might qualify or not. In terms of narrowing in, I would look more at the broader split between public and private,” Hansson said.
Hansson also expressed support for Draghi’s considerations to reduce the frequency of ECB monetary policy meetings. “We do not usually change things month-by-month. I do not see a lot of disadvantages in having fewer meetings. Also in terms of possible publications of the summaries it makes a lot more sense to have a longer cycle. I don’t see how you can produce meaningful high quality summaries in a space of a month that would not somehow interfere with the message,” Hansson said.
In terms of the broader economy, Hansson conceded that first quarter GDP in the Eurozone, which slowed to 0.2% from 0.4% in the final three months of last year, may have come as a disappointment to markets, but argued that it’s not clear to what extent the sluggish pace would impact longer term prospects for growth and price developments.
“We always said that the recovery is there but that it is going to be slow it is going to be fragile so you expect that quarter on quarter, some quarters may be a bit better and some may be a bit worse. In this sense, it confirms the view of a slow and fragile recovery,” he said. “All the soft data that we have had for this quarter too is more on the encouraging side so that probably we will have a fifth quarter of positive growth as well.”
Source: Bank of Estonia
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