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--QE Would Be Downturn Option, But Last Resort
--Changes To Forward Guidance, Rates, Reinvestment Could Come First
--ECB Hasn't "Really" Discussed Tiering Deposit Rate
By Luke Heighton
FRANKFURT(MNI) - Quantitative easing could return in the event of a major
shock to the eurozone economy, the governor of the Central Bank of Estonia told
MNI, as he admitted the European Central Bank has fewer monetary policy tools to
choose from than previously.
"Of course the more you have used, by definition there's less to choose
from going forward," Ardo Hansson said. "But there are other elements you can
push, including using forward guidance. The next step in the sequence would be a
change in the interest rate and then later on a change in the reinvestment
policy, so one of the degrees of freedom is calibrating the dates along the
Referring to further possible quantitative easing, he said: "I've always
thought of it as a kind of last resort, and I don't see it on the horizon right
now. Now that we have the experience with it it's certainly part of the toolbox,
but communication on interest rates is much closer to the conventional."
Tiering the ECB's deposit rate "hasn't really been discussed" by the
Governing Council, Hansson said, "and I would have some problems with it. If the
issue is bank profitability then it's better to deal with it through other
"As long as we think that for monetary policy reasons we need negative
interest rates, then that comes first and foremost. It's not at all clear that
the situation would be better if the central bank had done nothing and just let
things evolve. Maybe the banks that are more impacted have to think a little bit
harder about shifting their business model away from a reliance on retail
--MONETARY TRANSMISSION WEAK
Hansson admitted that the delayed passthrough to inflation from tightening
labour markets and increased employee compensation meant "the last step in the
transmission has been weak."
"But for all of the relatively downbeat mood of the last few months,
generally speaking all the labour market indicators have been really good. Wages
are going up, unemployment is going down much faster than we expected. That's an
important part of the whole evolution, and it's why one can retain confidence
that we're going in the right direction. There's no reason to believe that
companies won't ultimately restore their profit margins, we just need to be more
The possibility that European elections could lead to the appointment of
national central bank governors sympathetic to the whims of populist
politicians, with implications for the independence of the banks themselves,
"can't be ruled out," Hansson said.
But, he added, "although it might change the atmosphere [in the Governing
Council] I wouldn't be concerned that it would alter the outcomes."
Hansson was also sceptical about the need for eurozone sovereign
bond-backed securities, an idea championed by incoming ECB Chief Economist
"It's up to governments to decide,' he said. "At the end of the day
financial engineering is not going to replace better fundamentals and policies.
If you create more elements of safety in one part of the system you're just
taking them away from other parts."
--MNI London Bureau; +44 203 865 3829; email: firstname.lastname@example.org