MNI SOURCE: ECB Still Has Unlimited Policy Ammunition Post-APP

--No Limit To What ECB Can Purchase Or Policies Can Adopt: Eurosystem Source

--Normalisation Does Not Mean ECB Will Be Inactive If Needed: Source

     LONDON (MNI) - The European Central Bank will, if needed, still have

unlimited headroom for intervention when the current asset purchases program

terminates and interest rates start to rise, a senior Eurosystem source told MNI

in exclusive comments.

     The official downplayed rising concerns across the eurozone that the ECB

risks being faced with an ammunition shortage in the normalisation long run,

particularly in the wake of new economic crises if it fails to promptly exit

from its current accommodative monetary policy.

     "(The idea) is pure nonsense. The issue of running out of ammunition is an

alarmist refrain that has been regularly used as a scarecrow by markets and

financial speculators in the past ten years after each end phase of particularly

expansive policies adopted by central banks, mainly the ECB and the US Federal

Reserve," said the source.

     In his view, attempting to exploit these instrumental issues has the clear

objective of pushing the ECB to end the purchase program quickly and raise

interest rates in order to be able to then cut them once again when a new

downturn strikes.

     One proponent of the ECB 'buying insurance' is Bundesbank President and

Governing Council member Jens Weidmann. Back in March, he told an audience in

Frankfurt that a normalisation of policy will also open up some leeway for the

central bank to react on possible future economic downturns "Because the current

upswing won't last forever either." 

     According to the Eurosystem source, it is "crucial" that rates remain at

current levels for an extended period of time, and well beyond the end of the

APP, "in order to consolidate growth and allow the eurozone's economy to fully

absorb the benefits of monetary policy transmission." 

     The official was at pains to point out that the Governing Council wasn't

currently discussing any potential post-APP tools as it would be far too

premature and "out of place" at the moment, although arguing that there were

many options available if needed.

     "The topic is not on the agenda for mere timing reasons, and not because we

are lacking other measures or instruments which we could deploy if needed," he

noted.

--OVERFLOWING TOOLBOX

     The message the ECB is aiming to get across during the current unwinding

phase, is that the APP termination and consequent rates hike, will not lead to a

"blackout" era of non-intervention. Normalisation does not translate into

"inaction" or "going into freeze-mode", argued the source.

     The ECB's ammunition box was still reassuringly full and its space for

intervention wide. "When, and if it will be necessary, we will find adequate

instruments. Let's put it this way: There is no limit to what we can do and

purchase, nor to potential monetary policy tools, programs and measures we can

adopt," said the source.

     Among available programs remains the Outright Monetary Transactions (OMTs).

"We haven't yet discussed if the OMT could be appropriate, but it is one option

that tackles disruptive risks in the monetary transmission mechanism. It is

however subject to the introduction of specific fiscal policies in member

states," the source said.

     "The OMT have been set-up but not -- so far -- adopted, yet all those years

ago when the Governing Council mentioned their availability, it was enough to

soothe market fears and lower (bond) spreads," the official observed.

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

[TOPICS: M$E$$$,M$X$$$,MT$$$$,MX$$$$]