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By Christian Vits
LONDON (MNI) - While there is some discussion in several national central
banks about the inflation development and whether the European Central Bank has
been pushed into a corner with its commitment to target 'below but close to two
percent', Eurosystem sources contacted by MNI believe that it is far to
premature to trigger a discussion about the bank's strategy.
"That is something which might be discussed when we have ended all
extraordinary measures and find ourselves in the new normal," the first source
said. "The perception is that any discussion about the strategy would only yield
negative effects right now, for this reason such a fundamental debate is not on
Still, there is quite a bit of discomfort about the current strategy: "Two
percent was set as an upper limit for inflation, but has transformed into a
lower limit as well," the second source said. "By all means, one could certainly
have the understanding that the upper limit is not the same as the lower bound."
"The notion seems to become more and more established that a simple
fixation on 2% as the upper and the lower bound is not the way forward," he
added. "A strategy change is not taboo. But any change should be out of a
monetary policy conviction, not because of the situation we are in."
--HANDLING THE STOCK
Of other points for the Governing Council to focus on, there is the
question evolving of how to handle the stock of assets held. "This is a
discussion which has not even started yet, as it applies to the new normal.
That's a discussion not needed before 2019," the first source said. "It is in
question what instruments should be available, but no matter whether you use
However, liquidity supply is now completely different to the pre-crisis
situation. "There is no money market anymore," the second source said, "in
particular in the unsecured money market. I expect that over the medium-term,
banks' liquidity supply will be backed by central bank money."
As a consequence, central banks such as the ECB will possibly hold parts of
the stock they bought. "First of all, one has to decide to leave a liquidity
buffer in the market." This might be E1 billion, or "about half of the current
balance sheet," according to the source.
There has to be a landmark decision to follow such an approach. But
everything seems possible at the current juncture.
"The mistrust between banks, the mistrust about unclear positions in
balance sheets has not lessened," the first source said.
Any policy change in this respect won't happen before the negative interest
rate on deposits is reversed, the other source noted.
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