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--BoF Valimaki: Determining Exact APP Exit Timing Counterproductive
--Calls For Extreme Caution In Taking Normalisation Steps
By Silvia Marchetti
ROME (MNI) - The European Central Bank's net asset purchases will only be
phased out when inflation is on a sustainable path towards target, a senior
Eurosystem official told MNI in an exclusive interview.
According to Tuomas Valimaki, Bank of Finland's chief economist and a
member of the Eurosystem of Central Bank's Monetary Policy Committee,
reinvestment of maturing funds will continue for the foreseeable future.
"The net purchases under the APP will be phased out only when euro area
inflation is on a sustainable path towards the ECB's inflation target. Under
those circumstances, the Eurosystem will continue reinvesting the volumes
maturing under the programme," Valimaki said.
"By this construction the scaling back of the very accommodative stance is
likely to be controlled, and one that minimizes unwarranted market reactions,"
In Valimaki's view, determining the exact timing of the APP exit by setting
a specific date would be counterproductive.
--CALL FOR CAUTION
Moving forward, Valimaki notes that potential post-crisis normalisation
risks, as the ECB reverts back to conventional measures following the adoption
of unconventional ones, calls for extreme caution, particularly while Eurozone
growth remains subdued.
"The big difference between conventional and unconventional measures comes,
almost by definition, from the central bank's capacity to anticipate the impact
of the actions on to the real economy and price developments," Valimaki said.
"The most obvious risks for a central bank when reverting back from
unconventional monetary policy measures relate to assessing the impact of the
actions to be taken and their correct timing," he noted.
According to Valimaki, there are two main reasons for this:
"First, whereas one has a good sense on the transmission of conventional
measures - how a change in the central bank policy rate impacts the yield curve,
the bank lending rates and eventually inflation - it's less clear how the
application or unwinding of measures never taken before will influence the
markets and the economy," he explained.
"Second, even if the euro area GDP has been growing already for quite some
time, one cannot currently estimate precisely the level of slack in our economy.
This is only natural, after having had to fight against liquidity trap for
several years and after significant reforms as in the labour markets of some
euro area countries," he added.
"This complicates the central bank's decision on the timing and pace of
scaling back its monetary accommodation," Valimaki stressed.
But there's also another market-related issue at stake needing
consideration in preventing a premature monetary policy normalisation.
"After several years with too low inflation, inflation expectations have
shifted downwards and some of the expectation measures derived from the market
data are even to levels well below the ECB's definition of price stability," he
"A too early exit could thus be taken as an indication of the central
bank's preferences around its inflation target. This is the case for the ECB in
particular, as the wording of its price stability definition (below, but close
to 2%) can be seen as asymmetric," Valimaki added.
--MNI London Bureau; tel: +44 203-586-2225; email: email@example.com