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By Luke Heighton
FRANKFURT (MNI) - The European Central Bank's ability to boost the economy
with interest rates is almost exhausted, a former Governing Council member told
MNI, though both the eurozone and the U.S. could be set to relaunch QE.
"It seems to me that the Fed is going to turn to QE quickly next time,"
former Central Bank of Ireland Deputy Governor Stefan Gerlach said in an
interview in Zurich after the Swiss National Bank's June 13 policy meeting.
"They know how to use it and they will be able to do it quickly. The ECB
could well do so too, but it is constrained by the limits it has declared. I
don't think you can deviate much from the capital key. It would be very
difficult to do so without raising legal challenges."
"But take the idea of the ECB not buying more than 33% of any country's
bonds. A credible ECB president such as Mario Draghi can say 'You know what,
it's inconceivable that Germany, the Netherlands, France, and Finland would have
a fiscal problem, so in those countries we're going to buy 50%' - if you can
sell that - then more things are possible."
Gerlach, currently chief economist at EFG Bank, Zurich, spent four years in
Dublin before stepping down in 2015.
He said he did not think the markets' interest rate expectations have
become decoupled from those of the ECB, but that forward guidance "is not a very
powerful instrument," and that the ECB's interest rate policy "is essentially
"Negative interest rates are also not a silver bullet," Gerlach said. "I
wouldn't expect to see rates go much lower. The ECB could introduce tiering and
cut rates a little bit, and keep them lower for longer than it planned
previously. But it is difficult to believe that his will have a huge effect."
However further cheap loans to banks via the ECB's targeted longer-term
refinancing operations could be "useful" and "are the most effective way of
dealing with the problem," he added. Asked whether the ECB could launch a fourth
round of TLTROs before its third round -- due to be first issued in September -
has matured, he said that such a measure "could always be used."
The 'big question,' Gerlach added, "is whether there is a growing
understanding in Europe that expansionary fiscal policy is necessary. I think
In addition to the U.S. trade tariffs imposed on China, a key factor
checking eurozone growth is persistent uncertainty caused by the threat of
further protectionism. Could Europe, and Germany in particular, be Donald
Trump's next target?
"It could well be true," Gerlach said. "I think this is a serious issue,
and very serious for Germany. It's not going to be a pretty sight."
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