European Central Bank Governing
Council member Yves Mersch comments on inflation, monetary
policy and economic developments in the 17-nation euro area. He
spoke in an interview in Luxembourg yesterday.
On how confident he is that the inflation rate will fall below 2
percent before the end of the year:
“If you hold the line based on December projections, then
you would still say nothing’s changed. But if you look at what’s
happened since, I would not be surprised if we would have to
adjust somewhat our language.”
“We are experiencing a new external shock, this is not
only coming from oil prices, it’s all kinds of commodity prices
and on top we also have pressure on food prices.”
On so-called second-round effects:
“The question is to what extent those are translating into
second-round effects. This is still a matter of assessment as
we’re still at the beginning of the process. We already see at
the level of input prices very strong pressure. The question is
whether these pressures will move through the whole pipeline.”
“The question now is how salaries will develop. Luxembourg
already has automatic second-round effects, with the highest
unit labor costs in the euro zone at this point in time.”
“The question for the whole of the euro area is whether
this potential threat will perpetuate over the time horizon or
not. I think that warrants a thorough exchange of views of all
the governors on the Governing Council and the members of the
board because they bring in their wealth of experience.”
“I would not be surprised if we adjust our assessment of
risks compared to December. I would not be surprised at most
colleagues concluding that we have upside risks to price
stability.”
On whether the ECB will need to act on inflation:
“Will that need policy action? I must also say that this
is simply the assessment of risks, we will have to monitor the
upside risks very carefully. I do not deny that there are also
downside risks and I would simply say that the balance of risks
will move from broadly balanced to slightly upward.”
“But that is also in line with all the private forecasters
who have published information during January while our
information goes back to November.”
“We will probably see that over the whole year of 2011,
the average will be above 2 percent. Now the question is what
about 2012, will this be a temporary hump or will this translate
into a plateau? This very much depends on second-round
effects.”
On domestic price pressures:
“We must say that for now, domestic pressures remain
contained” and “inflation expectations still appear to be
anchored — for now. That’s why I said this requires very close
and tight monitoring in order not to get behind the curve.”
“Since I am not an inflation fighter of the 11th hour, I
don’t need to establish my credentials by gesturing with V-words
at the moment where the threats appear but are not yet real. But
I agree this needs very close monitoring. Any indication we get
that we move into a plateau would prompt the ECB into being
faithful to its primary objective, all the more since we are
well aware of the high costs to welfare should inflationary
expectations would become dis-anchored.”
On whether rates can stay this low forever:
“There are other observations which we have to follow
closely, for example, we have seen that capacity utilization is
coming back very rapidly to average.
“We will also see that unemployment is also still at a
very high level, but on the other hand, basic demographics in
some countries will kick in with a negative trend from 2013
which is not too far away. And then we will see that the
momentum for reform is still a bit lackluster which means that
potential growth, which has fallen, also creates a threat for
inflationary pressures as the output gap might be closing much
faster than we might be anticipating.”
“These are some kind of structural elements in the
inflation dynamics which we have to observe, together with
immediate observations linked to the salary negotiations and
near-term results. Only now, our focus is very clearly on our
primary mandate.”
On whether rates are still appropriate:
“This is the unanimous assessment of the Governing Council
at the last meeting and what will be our assessment at the next
meeting the president will be very happy to answer.”
“It also appears that our interest rates are at an
exceptionally low level, which was warranted by an environment
where there was anemic growth and even negative growth over a
prolonged period, and therefore no inflationary pressures. This
situation has now changed and this would mean that inevitably we
also have to rebalance our monetary policy stance and we are
fully aware that excessively low interest rates create
distortions in the economy and are also likely to be a favorable
field for asset inflation.”
On whether the ECB considers it already too late to stem asset-
price inflation:
“There are new instruments that could in future be more
effective in dealing with these kind of tensions than the
instrument that we use for monetary policy, that is why we have
set up the ESRB.”
“For financial stability issues, I think prudential policy
instruments could to some extent be more effective than interest
rates. But the two are interacting and we have to take the two
into account when formulating policy.”
“However, monetary aggregates do not give us directions
into being late. Signals from growth are rather positive, we
seem to have quite a bit of momentum on the growth side from the
beginning of the year, the 0.3 percent increase of growth in the
fourth quarter was also mostly due to special factors such as
winter and strikes and so on, so we might have even more
momentum on the growth side and even there our risk assessment
that it was slightly tilted to the downside might be at the
discussion be reassessed.”
On whether he’s comfortable with markets pricing in a first rate
increase in September:
“I observe with great interest all developments in
financial markets and also what financial analysts have to say
about it but you also know that our policy is never to pre-
commit. We make decisions on the basis of our intelligence which
is based on information supplied by both pillars every month. We
have seen how large the uncertainty surrounding markets still is
and we should not move into a posture of overconfidence by
trying to make forward commitments in a period where uncertainty
is still quite high.”
On how the ECB deals with diverging euro-region economies:
“In my opinion that also shows that monetary policy cannot
stand alone to manage the whole zone. We also need increased
awareness that responsibility of each country does not let the
divergences develop by using the policy instruments that are
still in the realm of national policy making.”
On whether the ECB shouldn’t just draw a line in the sand as
governments struggle to toughen crisis-prevention measures:
“I am very happy that President” Jean-Claude “Trichet
has come out very clearly in the last couple of days on this
matter and I fully subscribe to what he says.”
“There is an agenda we all know, which is the end of
March. I think we should give everyone the time to do their job
within the agreed time framework and what is on the table are en
large the proper ingredients and I hope that the cooks will make
the proper use of the ingredients.”
“For me what’s important is the outcome. I think all the
ingredients that are important have been mentioned. There’s not
a lack of ideas and there’s not a total denial or refusal on
most of these ingredients. What sometimes creates insufficient
consensus is how they should fit into each other, what method we
should use — a community method or the inter-governmental
method — and how it would work out. From that point of view
there’s still some discussion that’s needed.”
“I know that the markets have very high expectations and
the higher the expectations, the higher the risk if these
expectations will not be met. But this being said, I think the
central bank, the monetary authorities, are also acknowledging
that they have gone to the maximum of what could be done from
their point of view and if our democracies insist on becoming
suicidal, in the end it’s very difficult to prevent them, since
in the ultimate sense it’s our democratically elected
governments who take decisions.”
“You cannot overburden monetary policy to the extent of
putting its primary mandate into question. This has not been the
case so far.”
On whether there’s a risk of that becoming the case:
“A central banker always sees danger around the corner,
even if it’s a blind corner. We should also not indulge into
panicky statements. From this point of view, I think it’s
premature to say the situation is beyond repair. Not at all. I
would not go into this direction.”
On the next steps in the ECB’s exit strategy:
“We will most probably make a statement about the next
steps in our gradual exit strategy. What I say means two things:
we are in an exit strategy. And second, it is gradual. And we
assess the situations on the basis of the conditions, which
prompted us to introduce these exceptional measures. It has
already been recognized last time, and the president during the
question and answer made it clear that he and the Governing
Council are of the opinion that there are signals of improvement
in the functioning of the market. But there are also still
market segments which are still not working perfectly.”
On whether these are market or geographical segments:
“I would say you could find examples in both to be fair.
We have taken the decision to tackle those. I think you must
also admit that some of the decisions that we have announced are
first to assess a situation. For example, the next question you
ask will probably be the addicted banks.”
On how the ECB is going to deal with addicted banks:
“One is to assess it. Second is to study it, to come up
with proposals. After the proposals you have to calibrate and
see what the consequences are and what are the interactions with
other decisions that you have taken in your policy-making area.
And then you announce the decision. I can tell you that we are
very far in our decision-making process.”
On whether introducing higher interest rates for addicted banks
would solve the problem:
“I cannot confirm that the solution that will be announced
is a solution that is only a solution where price is affected.
There can also be solutions where you act on the quantity. It
will be announced in due time. Basically, whatever you do in a
market economy, you can have an approach through the price, or
you can have an approach through the quantity. What I say is not
a pre-announcement. It’s only making a logical deduction”
On whether you could combine the two:
“It’s not excluded that you can combine two elements, but
again, my purpose why I said it is: This also has an inter-
action on other non-standard measures and vice versa. If you
have a solution for one stream of problems, you can in the same
moment also create conditions for exiting another stream of
particular measures. This is what I wanted to make clear. We
discussed the whole spectrum of our non-standard framework. It’s
a framework where the exit is gradual and the next round of
decisions will be made public in 10 days.”
On whether the ECB can raise interest rates while non-standard
measures are still in place:
“That was for me clear from the outset. The separation
principle of liquidity management is different and separated.
That was very clear from the beginning. Even though at one
moment in time, it didn’t appear as such. I agree with that. If
you are not aware of unanimity or dissent in the Governing
Council, this is very surprising. Because some have made it
public.”
On decisions taken on unconventional measures:
“It’s obvious; this is not a black and white discussion.
There are nuances and graduations and in the end there’s one
decision coming out. The president has stated and re-stated that
this decision was taken by an over-whelming majority, but he’s
also made it clear that he himself, or a majority, or maybe all
do not feel excessively comfortable by having these instruments
perpetuated and that they are temporary. And I want to stress it
again: they are temporary.”
On whether he supported the bond purchase program last May:
“Everything what’s from inside the Governing Council and
which has not been made public by the speaker of the Governing
Council, has to remain within the Governing Council.”
On whether the ECB will keep buying government bonds if the
region’s rescue fund is not empowered to do so:
“I cannot imagine that nothing would come out at the end
of March of the decision-making spheres. This also includes the
recognition that what is in place now, needs to be made
permanent, needs to be improved in terms of quality and in terms
of quantity. While the discussions focused mostly on quantity at
the last discussion of finance ministers, as far as I learned
from the newspapers or from the media, there still remains also
to have the same quality of consensus coming out as concerns the
quality. This means, the flexibility that would be needed to
make this new” stability mechanism “being used in the interest
of the currency and economic union.”
“My scenario is not one that there will be a failure. Our
decision is totally separated from the decision of the political
side. We have introduced these measures in order to improve the
functioning of markets and transmission mechanism of monetary
policy. If the policy side takes measures itself that would
contribute to the same result, obviously this would be a great
support for what we’re aiming at.”
“Putting myself into conjectures and speculations what
would happen if it would not be done; well I can only tell you
that we have an objective and that we stand by that objective,
which is a primary objective. No instrument can deter us from
that.”
On how concerned he was about sterilizing bond purchases:
“We have made a promise that we would sterilize those”
purchases “and we are in the habit of living up to our
promises. If for technical reasons this would not be possible,
we would have to find ways and means to maintain it. But you
know that the effectiveness, the practicality of it is anyway as
long as we are in fixed rate full allotment. It’s more a
question of terminology than implementation. So, let’s not
overestimate those small shortfalls.”
“It’s also obvious that if some of the non-standard
measures would not be prolonged, then the question of
sterilization could also be solved in the context of this non-
prolongation.”
On how satisfied he is with progress in Europe on fixing crisis:
“We’re still after 10 years of currency union on the
economic side in a learning curve. Unfortunately, in many
democracies, the learning curve only steepens when there’s a
crisis. Since we are still within the sovereign crisis inside
Europe, I hope that the awareness of the need to fix our
economies and adjust them to the need of a well-functioning
currency union is strong enough.”
“I think we have to remain confident that our leaders will
pull their act together. I would hate to have a different
hypothesis.”
On whether he’d like to become the next ECB President:
“You should ask that question to those we just discussed,
namely the leaders who will take this decision. This decision
will be taken according to the procedure and the content of
Article 112 of the Treaty.”
On raising interest rates before the Federal Reserve and how
concerned he is that this could push up the euro:
“We’ll raise rates when we find the situation warrants it,
not on the time axis that belongs to market analysts. We have no
exchange rate objective.”
To contact the reporters on this story:
Gabi Thesing in London at
gthesing@bloomberg.net;
Stephanie Bodoni in Luxembourg at
sbodoni@bloomberg.net
To contact the editor responsible for this story:
Craig Stirling at cstirling1@bloomberg.net
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Tags : Monetary