MNI POLICY: ECB Should Explore Yield Curve Control - BoS Chief

The European Central Bank should assess the practicality of adopting a form of yield curve control as part of its strategic monetary policy review, the governor of the Central Bank of Spain said in an interview Monday, also stating his support for a symmetrical 2% inflation target and hinting at the possibility banks' eligibility for Targeted-Longer Term Refinancing Operations could be increased.

"I think yield curve control is an option worth exploring," Pablo Hernandez de Cos told Central Banking. "If sufficiently credible, yield curve control allows the central bank to achieve a yield curve configuration with a lower amount of actual purchases, hence, enhancing efficiency."

Pursuing such a strategy in the19-member eurozone would be more complex than in other jurisdictions, Hernandez de Cos conceded, but "you could still target all 19 curves," requiring a commitment to flexibly buy as many sovereign bonds of those countries as needed – "something that could be challenging from an operational and even a legal perspective."

RISK-FREE CURVE

An alternative would be to target the risk-free yield curve, he continued. Both strategies would probably deliver similar outcomes, Hernández de Cos said, though he stressed neither has yet been discussed by the ECB's Governing Council.

Asked about media reports suggesting the Governing Council had at its December meeting rejected ECB chief economist Philip Lane's proposal that banks' borrowing capacity with regard to TLTROs should be raised from 50% to 60% of their eligible loans, settling instead on 55%, Hernández de Cos said: "Of course, if the number of banks at the new limit, or close to it, remains high, it would probably suggest the convenience of a further increase in that limit. But for that we will have to wait and see."

The ECB's current definition of price stability as inflation rates below, but close to, 2% "doesn't provide a clear objective, Hernández de Cos said, suggesting instead a symmetric focal point of 2%.

"It would be important to adopt a new formulation that leaves no doubt about this symmetric nature," he explained. "In my view, it should be interpreted as our determination to achieve symmetric outcomes. This means that if you've been below the target for a while, you should also accept inflation outcomes that are above the target for some time."