MNI INTERVIEW: No Need For More QE, Says ECB's Lautenschlager

--No Need For More QE

--Positive Effects Of More Rate Cuts Unclear

--TLTRO Repricing An Option

By Luke Heighton

     FRANKFURT(MNI) - The European Central Bank has no need to resume net asset

purchases at a time when the eurozone economy remains resilient, and it is

unclear whether any interest rate cut would have an overall positive effect, ECB

Executive Board Member Sabine Lautenschlaeger told MNI.

     "I do not see the need for a re-start of the APP. It should only be used if

you have a deflation risk and a deflation risk is nowhere to be seen now," the

former Bundesbank vice president said in Frankfurt on Wednesday, as market

anticipation of a significant package of easing measures builds before the ECB's

Sept. 12 meeting. Her remarks came after Bank of Finland Governor Olli Rehn

called for a "very strong package of policy measures" earlier in August,

although Bundesbank chief Jens Weidmann and Dutch central bank President Klaas

Knot have signalled their opposition to major stimulus.

     July's eurozone money supply data showed lending at relatively strong

levels, she noted, adding that firms continued to invest despite geopolitical

and economic uncertainties, raising questions about how much improvement an

interest rate cut could achieve.

     "Rate cuts are part of the standard monetary policy tools, so it is

something you should certainly think about before you consider non-standard

measures like APP. But overall we have to assess whether these instruments are

needed to support the transmission channel," she said, noting that, while she

agreed with the current "very expansionary" monetary policy, its side effects

also needed to be considered.

     --TIERING ALTERNATIVES

     The ECB said at its last Governing Council meeting on July 25 that it had

tasked its committees with examining measures to mitigate the effects of lower

rates, such as a tiering system which would apply different interest rates to

financial institutions depending on how much they deposit with the central bank.

Lautenschlager noted that tiering was not the only possible such measure.

     "Are there others that we have to look at? ... The banks always bring up

the gross burden, but they also benefit from the negative interest rate."

     In the event of economic deterioration, Lautenschlager indicated that one

measure to which she might be open would be a repricing of cheap loans to banks

made under the ECB's existing targeted longer-term refinancing operations.

     "That might be, yes," she said, "We can use different tools: a change in

forward guidance, TLTRO, rate cuts, the mitigating measures for rate cuts,

depending on whether the data shows a need for them, their impact, costs and

benefits. But overall, I don't see the need for a huge package."

     A resumption of net asset purchases would only be a last resort, she

stressed.

     "We are already in negative yield territory for many government bonds -

what kind of impact could further net purchases bring? We also need to consider

how big the purchase universe is when keeping the current limits. And keeping

the limits is for me of utmost importance to address the risk of monetary

financing."

     "Furthermore, I am concerned about setting the wrong incentives for

governments ... What is needed are structural reforms to foster sustainable

growth."

     --ASYMMETRICAL TARGET

     While Lautenschlaeger acknowledged the increased uncertainty facing the

eurozone at a time when China and the U.S. are locked in a trade dispute,

together with a "downward trend" in the German economy, she insisted that

overall eurozone growth remained resilient. She disagreed with the view,

expressed by prominent U.S. economist Larry Summers, that central banks are

running out of tools to influence the economy, but added that other

stakeholders, such as governments, need to pull their weight too.

     "Using fiscal space is one possibility for some countries. But let me

repeat the need for structural reforms. This is necessary for sustainable growth

and would give a boost to the competitiveness of many countries in the euro

area," she said.

     Lautenschlager was also doubtful about the move by the Governing Council to

refer in its July statement to the "symmetry" of its inflation target, a term

which was also stressed by outgoing President Mario Draghi in his press

conference.

     "For me it's asymmetric, as up to now the Governing Council has defined

price stability as an inflation rate of below 2% over the medium term while our

inflation aim is defined as close to but below 2%," Lautenschlaeger said. "A

change should not be done hastily but based on a holistic discussion about our

monetary policy strategy. Do I think that it needs to be changed? I'm not sure."

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

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