MNI INTERVIEW: ECB Net APP Phase Out Infla Dependant: Valimaki

--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,"

he agued.

     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.

     --INFLATION EXPECTATIONS

     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

argued.

     "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: les.commons@marketnews.com

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