MNI INTERVIEW: No Rush To Boost ECB Easing Package: De Guindos

By Luke Heighton

     FRANKFURT (MNI) - The European Central Bank's September easing package

should be left unmodified for some time, its Vice-President Luis de Guindos told

MNI, adding that incoming ECB President Christine Lagarde should also build

consensus within a Governing Council riven by unusually public dissent.

     The ECB's decision to cut its deposit rate by 10 basis points to -0.5% and

resume quantitative easing at a pace of E20 billion a month provoked a public

statement of disagreement by the central bank of the Netherlands and Bundesbank

President Jens Weidmann said that rules should not be changed to allow more room

for bond purchases. De Guindos told MNI in the interview Oct. 7 that too much

public disagreement could be counter-productive, but that further measures were

probably unnecessary for now.

     "There are 25 of us and, for sure, there are sometimes different views, but

when a decision is taken by a clear majority, it is important to defend it. It

would be much better if we tried to reduce the level of surrounding noise," he

said.

     The ECB's September measures should now be allowed to work, he said, noting

that Lagarde, who will succeed Mario Draghi on Nov. 1, will be key in forging

agreement on policy.

     "The president sets the agenda and sometimes even the timing of the

decisions we take. And afterwards he or she has a very important role in

creating consensus, as the more consensus we have, the better for the

institution, also in terms of effectiveness of the decisions," de Guindos said.

"But the president aside, the rest of the Governing Council is going to be more

or less the same, and this is a collegial institution. And the concept of a

package is something you can use perhaps once a year, but not every month,

because otherwise you undermine its effectiveness."

     "The package has to be stable, and we have to be predictable. So if we

start saying that we can modify some elements or some parameters within it, we

start to undermine its effectiveness."

     The eurozone economy faces significant downside risks, de Guindos said,

noting that the possibility of a no-deal Brexit or an escalation of global trade

tensions had not been included in the ECB's baseline scenarios.

     "If these downward risks materialise, the growth outlook will deteriorate

further, from already very low levels."

     --NEGATIVE SIDE EFFECTS

     The ECB's current level of interest rates is correct for now, he said, and

any further cuts would have to take into account the side effects of easy

policy, which, he said, "are becoming more and more evident and more and more

tangible."

     "Monetary policy has to adapt to the lower level of the natural interest

rate, and we are going to hit the zero lower bound much more often than in the

past. This has implications for monetary policy, but also for the banking

industry, for the insurance business, for everyone."

     As monetary policy faces constrictions, de Guindos called for a greater

role for eurozone fiscal policy, including an "independent budgetary instrument"

and an independent fiscal authority.

     September's policy package also included the introduction of a tiered

deposit rate, allowing banks some relief from the effect of negative rates, but

de Guindos stressed the importance of the ECB's promise for key rates to remain

at present or lower levels until inflation has converged on its target and this

has also been consistently reflected in underlying price dynamics. The ECB also

said that its QE programme will run until shortly before it raises interest

rates, and that bond reinvestments will continue for an extended period after

that.

     "The core element of the package was forward guidance. People have not paid

much attention to that, but in my view, that was the main, important message,"

he said.

     While there have been calls for a review of the ECB's policy framework, de

Guindos said a discussion on modifying its inflation target had not begun.

     "It will be discussed by the Governing Council and perhaps with a new

president it will be different. But for me the kind of monetary policy decisions

you take and the tools you have to achieve the target are much more important,"

he said.

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

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