MNI INTERVIEW: ECB May Need Innovations Post-APP: Bini Smaghi

By Silvia Marchetti

     ROME (MNI) - The European Central Bank may have limited headroom for any

possible future interventions when the asset purchases program terminates,

Lorenzo Bini Smaghi, former ECB Executive Board member told MNI in an exclusive

interview.

     The post-APP normalisation phase implies going back to conventional

monetary policy after years of unconventional measures -- and it might not be a

smooth transition, Bini Smaghi argued, with the degree of growth consolidation

across the Eurozone playing a key buffer role in guaranteeing an easy switch to

normal mode.

     "As the US experience shows, if the economy continues to grow in coming

months, normalization should be on average easier, less complicated than

expected for the Eurozone," said Bini Smaghi. 

     --TRANSMISSION ISSUES 

     But many uncertain factors loom. "The real issue, however, is whether all

components of the Eurozone are ready and all elements of the transmission

mechanism, in particular the banking system, are prepared for normalization.

Whether we are sufficiently ahead into growth recovery, debt reduction, and the

capital position of the banking system," he warned.

     Countries more exposed to debt, and where bad loans are still significantly

high, could face a tougher period ahead if they fail to boost fiscal efforts and

strengthen their financial systems ahead as APP draws to a close.

     Italy is among the countries still in difficulty. According to Bini Smaghi,

to ensure that monetary policy normalization and the higher rates that will

eventually follow will be easily absorbed by Italy's economy, it is necessary

for both debt stabilization and reduction, alongside an acceleration in curbing

the ratio of non-performing loans.

     The whole of the Eurozone, not just Italy, must be adequately equipped to

weather the normalization period, and the slower than expected growth of the

start of 2018 is not an encouraging sign. June will therefore be a key month to

fully evaluate 'real-time' growth and inflation outlooks as the latest Staff

Economic Projections are published.

     --FRESH BULLETS

     Another critical issue is what happens next, after the ECB reverts to

conventional policy and tightens its accommodative stance. Any future tool box

could risk facing a potential ammunition shortage, with a narrower degree and

scope to fight any potential future cyclical downturn, especially if the central

bank misses chances for a timely exit from its extraordinary measures.

     "If we consider that it is hard to do more Quantitative Easing (QE) given

the percentage of public debt that the ECB already holds in relation to some

countries, and that we are still in negative rates, if another slowdown comes

the ECB might not have further room for manoeuvre. It would need to be

innovative," Bini Smaghi stressed.

     Rethinking the stock of investments in the ECB's balance sheet would not

solve the issue. The point is not whether it could be an option for the central

bank to hold parts of the stock to gain a new instrument in the monetary policy

toolbox -- and which would be the most appropriate -- but how and when to act in

order to spare ammunition for future needs.

     That is why in his view keeping some powder dry could contribute in

building headroom for potential monetary intervention in the post-normalisation

era.

     "Certainly, the ECB will want to be in a position to have some adequate

instruments to use when the next slowdown comes," he noted.

     Bini Smaghi also noted that the normalisation period would be a gradual

process, reflecting the growth trend across the bloc, noting that the would need

start with the deposit rate below zero.

     "Normalization at a certain point also implies raising rates -- especially

bringing them back to zero -- though the timing will depend on the economic

situation," he said.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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