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MNI (London)
--Criticises ECB For Premature Normalisation
--Sees Limited Ammunition Left For Future ECB Stimulus
     LONDON (MNI) - The European Central Bank should be wary of flip-flopping on
monetary policy decisions over a short time frame, as there is a risk of sending
confusing signals and creating a credibility problem, a prominent former
high-ranking ECB official told MNI.
     Reversing recent policy decisions will increase market uncertainty as
"nobody knows at this stage what to expect any more from the ECB's next steps,"
said the ex-official, who wanted to remain anonymous.
     While acknowledging such about-turns have occurred in the past, he said
exiting a policy prematurely, only to restart it in quick order, was risky. 
     In little more than a year, the ECB's Governing Council has gone through a
tapering of its Asset Purchase Program (APP) to ending purchases altogether to
now considering relaunching the program.
     "Tightening unconventional measures ahead of time, when growth has not yet
consolidated, and then having to go back and unwind these same measures after a
few months is not constructive and could be counterproductive," the former
official warned.
     Individual countries in the Eurozone were at different points in the
recovery cycle, the source said, with some better positioned than others in
fiscal and banking consolidation, he continued.
     "Normalization was planned based on the assumption, perhaps a bit too
optimistically, that the Eurozone's economy was finally gaining pace and the
picture would have certainly been rosier," he added.
     Talking in Sintra recently, ECB President Mario Draghi said a QE re-boot
and further rate cuts were among the tools still available to the Governing
Council to tackle a fresh downturn across Europe, reaffirming the ECB's mantra
that it stood ready to do 'whatever it takes'.
     According to the former official, even if there is an about-turn on policy,
the ECB has little headroom for either further rate cuts or additional QE
     "We must be realistic and admit it is indeed hard to do more QE given the
amount of public debt that the ECB already purchased for some countries during
APP, nearing the 33% of public securities threshold."
     "It is nearly impossible to pursue purchases of govvies, or enlarge these
in the future, no matter what technical twists the ECB comes up with," added the
former official.
     He said not all of the central bank's policies would meet such stringent
     "The Outright Monetary Transactions (OMT), which have been regularly
suggested to reassure markets, indeed envisage an unlimited purchase of state
bonds by the ECB, unlike the APP. But these are not a monetary policy instrument
so much as rather tight fiscal framework programs to which specific indebted
countries must abide by," the ex-official maintained.
     On a slightly different track, the ex-official warned the ECB against
obsessing over dovetailing policy with the Federal Reserve. 
     "If the US adopts a more accommodative stance it doesn't mean Frankfurt
can't afford to be less accommodative and fail to follow the U.S.'s steps," he
--MNI London Bureau; tel: +44 203-586-2225; email:
[TOPICS: M$E$$$,M$X$$$,MT$$$$,MX$$$$,M$$EC$]
MNI London Bureau | +44 203-865-3812 |