MNI INTERVIEW: If Need, QE ECB's Tool Of Choice: Ex-BOI Rossi

--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.

     --UNLIMITED AMMUNITION

     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.

     --CREDIBILTY

     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

necessary.

     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.

     --FRAMEWORK REVIEW

     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: les.commons@marketnews.com

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