MNI POLICY: ECB Has Mandate to Buy More Sovereign Bonds - Rehn

By Luke Heighton

     FRANKFURT (MNI) - The European Central bank has the mandate and the

flexibility to exceed self-imposed issuer limits on sovereign bond purchases

under its asset purchase programme, Central Bank of Finland governor Olli Rehn

said in an interview published today.

     "I took another very close look at this," he said. "The ECJ and the Federal

Constitutional Court have clearly underlined the independence and flexibility of

the ECB within its mandate. At the same time, they stressed that all measures

must be proportionate and necessary."

     Rehn also described Christine Lagarde's "broad and deep policy experience

and proven leadership in the IMF" as "big assets for the Eurosystem."

     Here are the key points from his interview with Borsen-Zeitung:

     - The recent slowdown in euro area growth can no longer be seen as a

temporary dip or a "soft patch," Rehn said. 

     The recent weakness of German industry "is also mostly a consequence of the

trade conflicts and thus a cause for concern for the euro area as a whole." 

     "My philosophy is always that it is better to prepare for the worst than to

simply hope for the best," he added.

     - "Market-based inflation expectations remain too low, and that is a cause

for concern," Rehn said. 

     He said that that is why it is particularly important that "we are very

clear both in our policy-making and in our communication."

     - Rehn would not be drawn on the outcome of the ECB Governing Council's

July meeting, but said that EC head Mario Draghi has been "very clear recently:

We are always ready and determined to act if necessary and to adapt or use all

our instruments." 

     "We have a number of instruments which are very effective and which, as a

package, have even greater effects than isolated, " he added.

     - Asked whether interest rate cuts are the "first line of defence", Rehn

replied: "We have parallel defence lines. Some are deeper than others. We will

analyse what the best options are and we will end up doing this very collegially

in the Governing Council. At the next meetings we will take the necessary

decisions to achieve our medium-term price stability objective."

     - Rehn said the Governing Council had "clearly indicated that we will

consider measures to mitigate the possible negative side effects of negative

interest rates in the event that we continue to cut interest rates or hold on to

very low rates for much longer. We are currently analysing this very carefully."

     - Asked whether the ECB would consider buying bank bonds, shares or ETFs,

Rehn replied: "I always think it makes sense to think outside the box. That

doesn't mean that it always leads to different decisions. But it often helps to

think creatively and not to limit yourself too much."

     - Rehn said he had "no concrete result in mind," for any future ECB

strategy review. "We should certainly maintain price stability as our key

objective. But we could discuss our definition of price stability. Strategies

such as those the Fed is now debating are certainly worth discussing." 

     He also restated and supported Draghi's assertion last month that the ECB

applies a symmetric approach to reaching its medium-term inflation objective.

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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