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MNI (London)
--QE, Not Rate Cuts Main Tool; ECB Fire Power 'Unlimited'
by Silvia Marchetti
     ROME (MNI) - Further asset purchases and not rate cuts would be the
European Central Bank's main policy tool going forward, former Bank of Italy
Senior Deputy Governor Salvatore Rossi told MNI, arguing that the potential for
lower rates was far-fetched.
     "Rates are already in negative territory, so it's hard to imagine that
further cuts could be the ECB's main instrument were it to further boost its
accommodative stance," Rossi said in an exclusive interview.
     "QE remains the key tool at (the ECB's) disposal" although technical and
political issues still needed to be overcome, said Rossi, who stepped down in
May after 6 years as second-in-command to Governor Ignazio Visco.
     "Technically speaking, more QE can always be done, the program is flexible
and the technical thresholds and caps can be adjusted (up or down) according to
needs," he said.
     The politics would be more difficult to overcome, Rossi said, with many
differing national policy position represented on the Governing Council,
creating "tensions that cannot be ignored," he added.
     He dismissed concerns that the ECB was running out of ammunition, arguing
it has the mandate to create unlimited money and were markets to challenge or
bet against its fire power and toolbox, they would lose.
     "The ECB always has headroom for further measures," Rossi said, "with its
scope of action unlimited and President Mario Draghi's 'whatever it takes'
statement always perceived as credible and realistic by markets" -- as it was
with the Outright Monetary Transaction, announced back in 2012.
     Rossi said that credibility must extend to any strengthening of the ECB's
forward guidance and the communication strategy over any rate hike delay should
be carefully considered.
     "Any extension to the forward guidance must be market-credible and
realistic", he said. "There's a precise trade-off between the forward guidance
timeframe reference and the credibility of its communication to markets."
     The ECB has already extended its forward guidance twice, most recently
pledging to keep rates at current levels at least until mid-2020 and beyond if
     The longer the rates are kept low and a first hike delayed, forward
guidance becomes slightly less credible to the markets going forward, so the ECB
must always present a pragmatic message, Rossi explained.
     Rossi also addressed a review of the ECB's policy framework, proposed by
some central bankers, saying it should not concern "the current inflation
target, which is always valid".
     "The prolonged low level of inflation should not lead to shift that target
downwards, in my view", he added.
     He also expressed concern that Europe's current slowdown could become
protracted, stopping a recovery in its tracks and delaying monetary policy
normalization, perhaps even pushing the ECB to consider more stimulus.
--MNI London Bureau; tel: +44 203-586-2225; email:
[TOPICS: M$E$$$,M$I$$$,M$X$$$,MT$$$$,MX$$$$,M$$EC$]
MNI London Bureau | +44 203-865-3812 |