MNI INTERVIEW 2: QE Could Return; ECB Has Fewer Tools: Hansson

--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

way."

     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

channels.

     "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

deposits."

     --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

patient."

     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

Philip Lane.

     "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: jason.webb@marketnews.com

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