MNI INTERVIEW: Key Quotes From Interview With ECB Ardo Hansson

--First part of two

By Christian Vits

     FRANKFURT (MNI) - Below are the key quotes form the recent Market News

interview with Estonia central bank governor Ardo Hansson:

     Q) On how likely it is that the ECB will revise upwards its projections on

growth and/or inflation in December:

     A) I am not looking at that level of detail and don't want to speculate. I

would say the last quarter's numbers were certainly pretty strong, 2.5 percent

growth is quite high. But generally, I would say, the economy has been evolving

broadly in line with projections, maybe a bit better. But how it translates into

projected growth figures - that is hard to comment. 

     In the last projection the risks were slightly on the upside in the

short-term and maybe more towards the downside in the longer-term. We still have

a lot of geopolitical risks and that could bring negative news but in the

short-term, developments have been a little bit stronger than expected. And that

is a change. 

     We had years when our projections were constantly disappointing. Now we are

in a different situation. In the last little while the outcomes have been better

and different institutions have slightly upgraded their projections. 

     On potential growth and the output gap in the euro zone:

     A) If we talk about the long-term rates of potential growth, I think they

are below 1.5 percent. But the last projections said growth will be more in the

range of 1.5 to two percent. So, we are growing slightly faster than potential,

the output gap is closing. 

     Now, if we experienced recently 2.5 percent growth and we think that

potential growth is quite a bit lower, the output gap seems to be closing very

rapidly. 

     Q) On the risk that a rapidly increasing output gap might pose to the ECB's

monetary policy:

     A)Well, it is only one number. If you only look at that indicator and think

there is a reliable link between the output gap and inflation, then we would say

we are very close to where we want to be. But this relationship has been less

stable over the last few years. And I also think you have to look at more

indicators, not only at the output gap. But you have to look at labour market

indicators and a whole range of measures. That doesn't paint such an optimistic

picture. 

     Q) On whether he agrees with Weidmann and Nowotny that it would have been

better to set an end-date for the APP:

     I think this is history now. We have made a decision, it is worded in a

largely consensual way and I think now to comment - I wouldn't want to do that.

I would say, this characterisation of closed versus open-ended - I don't think

it's a characterisation we ourselves use - but the analysts and the press have

been talking a lot about that.

     I think it is a bit of a mis-characterisation in the sense that it is not

such a black-white choice. It is not a choice whether you are open-ended or

closed-ended. 

     Every policy which looks closed-ended has an escape where things evolve in

a materially different way. And with an open-ended policy it is the same way.

Ultimately, what we are going to do is to be data-dependent. 

     If the economy evolves broadly in line with expectations, then that

communication could be taken at face value. Whereas if it turns out that the

actual developments are really much, much better, or much, much worse, then of

course, you have to revisit, in any case.

     If we would see an unexpected change in the outlook for inflation, I think

naturally we want to revisit this. But if things evolve broadly in line with our

current expectations, then I think there is not much difference, whether you

call it closed-ended or open-ended. 

     Q) On whether the program is carved in stone, in case there is a better

situation to materialize in spring:

     A) That is a bit speculative. I wouldn't want to comment on any specific

scenarios. But I think at least the communication would evolve if there was a

material change. You might give a slightly different indication about

longer-term intentions then. 

     Q) On whether all options are open for the APP:

     A) Yes, the options should be open on both sides. Because the decisions

which have been taken are based on a baseline scenario where you have

uncertainty on both sides. One can never rule out that things work out much

differently in one direction or another, it is never possible to rule out

anything. 

     Q) On the relevance of monthly buys compared to the re-investment of the

proceeds of its stock:

     A) I think at the beginning of the program, when accumulated stock was very

small and we made very large purchases, then the monthly flow was really the

most relevant figure.

     Now, after we have more than two trillion euros accumulated, we have the

commitment to reinvest for some time, and in that context the net asset

purchases are one part of the program. But I think the whole package is what

matters in the end, because the rest of the policy package starts to outweigh

the monthly purchases.

     From now on, whether you buy 30 billion, or 20 or 40 or whatever is less

important than the fact that the accumulated stock of purchases generated great

excess liquidity. It is a range of policies, what are impacting.

     Monetary policy is not only about asset purchases, but it is about the

stock, reinvestment and forward guidance. So, for some analysts, there was such

a focus on the APP volumes, but we sometimes forget that there are a lot of

elements of accommodation as well. The whole package, even if you leave aside

APP, is still very accommodative.

     Q) On whether the options to re-shape the APP are open to both sides:

     Ultimately, we pursue a price stability objective. If we are much more or

much less successful than we had expected in achieving that, then we should

somehow react.

     Q) On General Council members possible growing discomfort about the ECB 's

policy?

     A) Some are more patient, some are less patient, that's normal. 

     I tend to feel very positive about the economy. Therefore, I feel rather

convinced that sooner or later the developments - maybe with some lags - will

give support to higher inflation. 

     If you look at a chart pack of the real economy, the news is incredibly

good. We have every country growing, it is broad-based across sectors, the

global economy is growing, trade is increasing, consumer confidence indicators

are very high, unemployment is coming down, employment is going up, retail sales

are going up. There are very few elements of bad news.

     I think the link between slack and wage or price inflation is somewhat

disturbed in the short-term. But I think this will be re-asserted at one point

in time. Therefore, there is an element of confidence, and that is a reason to

reduce the purchase volumes. But I think we are not still there yet, in terms of

inflation, this has been somewhat subdued. 

     Q) On whether there is a rising possibility to end the APP after September

next year:

     A) It is likely to end in September, except if still more is needed. If the

economy evolves broadly as we expect, if we see an uptick in inflation and if it

looks sustainable, this element of the program could be phased out. You would

behave differently if there was a material deviation from the projections.

     Q) On the composition of the bond buying program an whether a shift to buy

more corporate bonds would be a good idea:

     A) Obviously, the composition of the buys will clearly shift due to the

fact that the volume is clearly lower. And we also communicated that the private

sector purchases will be significant. 

     Q) On how much of scope for maneuver is left, given the scarcity of assets:

     It is not an issue right now. Ultimately, every purchase program is

closed-ended in the sense that there is only so much you can buy. So, that issue

will come up one time. But I think this is premature to discuss. I think that

the issuer limits imposed are important. 

     Q) On his own discomfort about buying so much sovereign bonds:

     A) I have been always more positive about the corporate bond buys as they

direct the money where you want to have it. The idea was not to give governments

money and have governments run larger budget deficits. The idea was that those

investors you buy government bonds from reinvest the money into the real

economy. 

     I have been always more skeptical on the purchases of government sector

bonds and am a big fan of the private sector purchases. I think the corporate

bond buys are better, because you directly put money into the private sector.

     Q) On whether there are any conditions that would prompt for an adjustment

of the asset mix:

     A) Given that this decision has been taken, let's see how things evolve in

the first few months. You have to see how the market reacts to make adjustments.

I think a greater proportion of private sector purchases would make sense. 

     Q) On the re-definition of the APP's parameters:

     A) I personally feel very strongly about the issuer limit. If there is a

need to extend further, then you will go over different degrees of freedom.

Every decision then will see some kind of a trade-off. Every element of the

policy package has benefits and costs. But I think there is more scope. The

policy is much more than just asset purchases.

     I am not in favour to change the issuer limits.

     More

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI Frankfurt Bureau; +49 69 97782671; email: christian.vits@marketnews.com

[TOPICS: M$X$$$,M$$EC$]