MNI INTERVIEW: Eurozone Needs Prolonged Accomodative Policy

--The Eurozone Requires Prolonged Easy Money, A Bank Of Portugal Official Said

By Silvia Marchetti

     ROME(MNI) - The eurozone requires prolonged accommodative monetary policy

to avoid the risk of a credit crunch and to boost investment and productivity in

its more vulnerable members, Isabel Horta Correia, head of the Economics and

Research Department at Banco de Portugal, told MNI in an interview.

     Rising interest rates could potentially slow credit flows to the real

economy, hitting firms' profits and household consumption, warned Correia.

     In order to ensure "the normalization of credit conditions and the ongoing

financing of productive investment in the tradable sectors" it is essential to

pursue the "continuation of an accommodative stance in the monetary policy",

said Correia, specifically in relatively highly indebted countries such as

Portugal, whose exports are also vulnerable to rising global trade tensions.

     In December the European Central Bank's Governing Council pledged to

reinvest maturating bonds purchased under its quantitative easing programme for

as long as necessary, and in any case well beyond the first expected rate hike

after this summer.

     The Governing Council is also considering how to further support bank

liquidity needs when its last round of targeted long-term refinancing operations

begin to cease to count towards net stable funding ratios in June.

     --LOW GROWTH

     According to Correia, ensuring capital flows to the real economy is key to

offsetting trade risks and mitigating a scenario of lower growth in the euro

area.

     Current weak economic data across the bloc, together with trade tensions,

constitute the main downside risk for Portugal's export-led economy, she argued.

     "The Portuguese economy underwent some reforms in the labour and product

market in the latest years and there is evidence of reallocation of resources

towards the tradable sectors. In addition, the close macroprudential scrutiny of

credit developments, coupled with further fiscal consolidation should assure a

balanced growth path."

     Despite the progress achieved, prolonged accommodative monetary policy is

essential to boost investments in human capital and automation of productive

processes, alongside fostering a prosperous business environment that may

attract foreign direct investment, explained Correia.

     "An increase of the capital/labour ratio are the roots for Portuguese

structural growth, which coupled with the gains associated to the catching up of

human capital to EU average levels can mitigate, on a longer-term perspective,

the unfavourable developments associated to the ageing of the population that

pose important challenges".

     While Portuguese banks are at present in a better shape to meet liquidity

demands from businesses and households, Correia warned that more needed to be

done to strengthen the country's lenders.

     "Over the last few years capital and liquidity ratios showed notable

improvements. Profitability is also gradually recovering, reflecting

improvements in the situation of non-performing exposures, as well as better

operational efficiency."

     According to latest data by the Bank of Portugal total NPL stock has

dropped by 38% from the historical peak in June 2016.

     However, despite this progress, Correia said "banks should remain engaged

in further reducing the stock of non-performing loans and in pursuing the

adjustments in their cost structure."

     Also, "the banking system remains exposed to sovereign debt, reflecting to

some extent the favourable regulatory treatment of these assets", she added.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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