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REPEAT: MNI SOURCE: ECB Still Has Unltd Policy Ammo Post-APP

MNI (London)
Repeats Story Initially Transmitted at 09:40 GMT May 4/05:40 EST May 4
--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
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com

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