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--ECB May Find It Hard To Withdraw Stimulus, Kiel Institute's Felbermayr Says
By Luke Heighton
     FRANKFURT(MNI) - The European Central Bank might struggle withdraw its
ultra-easy monetary policy for fear of a spike in government debt costs,
trapping it in a situation of "fiscal dominance," the head of top German think
tank the Kiel Institute for the World Economy told MNI.
     "If you look at what ratings agencies say about Italian government debt,
they're very explicit that ECB support is relevant for their rating," said
Gabriel Felbermayr, also a former head of the ifo Center for International
Economics. "If the ECB were to stop those programmes, whatever their names,
whatever the official rhetoric around it, this has the immediate effect of
pushing interest rates up, increasing spreads and threatening the solvency of
Italy, Greece, Spain, Portugal. This threatens their recovery, as it limits the
fiscal space available to them."
     The ECB has "fallen into a situation of fiscal dominance," Felbermayr
continued. "In that sense, central banks are locked in."
     While the ECB's EUR1.35 trillion Pandemic Emergency Purchase Programme is
designed for "exceptional times", with monetary policy "almost at its limit,"
its use makes it "very clear we're close to monetisation," he said. Unwinding it
will prove a significant challenge.
     "Selling large quantities of bonds fast could cause massive losses on the
balance sheets of those banks that hold large amounts of government debt.
Monetisation per se is not what worries me; it's that the longer you are running
those policies the more difficult it will be to get out of them, and if we do
have some inflationary pressure somewhere - although I don't see it round the
corner right now - the cost of correcting central bank policies will be
     With the ECB's strategic monetary policy review expected to start in
September, Felbermayer expressed a preference for target intervals over strict
point targets. "That would be more honest," he said, "The more we think about
inflation targeting, the more we have to acknowledge that we are chasing a
     It would also be helpful, Felbermayr said, were the ECB to make its current
role of lender of last resort to European governments "more official."
--MNI London Bureau; +44 203 865 3829; email:
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