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Interview 2014-03-25

"Asset purchases must be examined critically"

Interview with Jens Weidmann published by the press agency Market News International on 25 March 2014

Jens Weidmann underscored the fact that, at this juncture, he sees no need for further monetary policy action. He noted that the central bank would, of course, be able to react should conditions deteriorate. However, Weidmann stressed that measures such as asset purchases would not only have to be judged by their effectiveness, but would also have to be in line with the provisions of the Treaty, adding that "we have to ensure that the prohibition of monetary financing is respected."

Interview conducted by Johanna Treeck.

European Central Bank Governing Council member Jens Weidmann said the ECB's monetary policy stance remains appropriate and that the recent strength of the euro offers no cause to adjust the central bank's medium-term inflation outlook. In an exclusive interview with MNI, conducted Friday, Weidmann signalled that he currently sees no immediate need for fresh interventions, but kept the door open for additional easing measures, including negative interest rates on the deposit facility and private asset purchases, should conditions in the euro area deteriorate.

While he did not slam the door on quantitative easing via government bonds entirely, the open crack appears slim. "The exchange rate is not a policy target, but it plays a role to the extent that it is one of a number of factors that influence price stability and as such is taken into account in our inflation forecast. So far, I see no reason to revise our medium-term inflation forecast." The ECB's monetary policy stance is both accommodative and appropriate, said Weidmann, who also heads the German Bundesbank. "The latest available hard data and sentiment indicators largely confirm the ECB's staff projections."

However, Weidmann conceded that if the euro continued to appreciate, the impact on the inflation profile might become significant. ECB President Mario Draghi earlier this month said that given low levels of inflation the strengthening of the effective euro area exchange rate is "becoming increasingly relevant in our assessment of price stability." Should a strong euro eventually pose a risk to price stability, Weidmann suggested that a further cut in interest rates may be the most appropriate tool to address such risks. "Changes in interest rates are part of our standard toolkit, whereas the non-standard measures currently under discussion might raise more issues. Even negative interest rates are uncharted territory, and their effectiveness in bringing about lower credit rates is debatable." "If you wanted to counter the consequences of a strong appreciation of the euro for the inflation outlook, negative rates would, however, appear to be a more appropriate measure than others," Weidmann noted. "But we are talking about hypothetical scenarios here and not about imminent decisions."

Weidmann also signalled that he sees no immediate need to inject fresh liquidity into money markets. "I am not worried about the money markets right now," he said, noting that volatility had subsided and the reduction in excess liquidity should be seen as a positive sign. Nevertheless, he reiterated that the central bank stands ready to better signal its accommodative monetary policy stance, if needed, citing a break in Securities Markets Programme absorption operations as an option. Weidman also said that changes to the Bank's forward guidance, which now includes a reference to the region's output gap, were made in order to broaden its message and shouldn't be seen as a major alteration. "Since we do not single out any particular threshold variable, our forward guidance is less specific than that of other central banks," Weidmann explained. "Hence, referring to the economic slack in the euro area did not represent a change in our forward guidance, but is fully in line with the existing, broad-based framework."

Weidmann went on to say that the Governing Council shares the view that the output gap is sizeable and will close only gradually. This should allow the central bank to keep a steady hand approach even as the economy begins to recover. However, Weidmann added that the Council equally agrees that "the output gap is a variable ... that can only be gauged with great uncertainty." Weidmann dismissed suggestions that the ECB's monetary policy approach may not be symmetrical, with the central bank showing more tolerance for inflation undershooting than overshooting it's 'close to but below 2%' target.Nevertheless, he conceded that with decreasing room to manoeuvre on interestrates, considerations are shifting. "Projected inflation rates are increasingly approaching our definition of price stability, although they are still some basis points short at the end of the forecast horizon. Taking into account forecast uncertainty it would be hard to argue that this deviation is significant," the Bundesbank President explained. "At the same time, we still have leeway to deploy conventional measures but their scope is limited," Weidmann emphasized. "And to that extent, the current policy debate is different from that in a normal monetary policy environment." "The unconventional measures under consideration are largely uncharted territory. This means that we need a discussion about their effectiveness and also about their costs and side-effects," Weidmann said.

Weidmann cautioned that a number of legal questions also remained unanswered, especially with respect to asset purchases, pointing out that the German Constitutional Court had underlined the limits of the ECB's mandate. "This does not mean that a QE programme is generally out of the question," Weidmann noted. "But we have to ensure that the prohibition of monetary financing is respected." He cited acquisitions of private top-rated assets as one option.Asked whether he could see any scenario under which he might agree to a QE programme via government bonds, Weidmann stated that this would hinge on its conformity with the Maastricht Treaty and on containing the risks of fiscal dominance and moral hazard that such a programme could create. Discussions as to whether QE via government bonds would violate the treaty are ongoing, Weidmann continued. "We need to discuss this and ideally achieve a common view," Weidmann said. "It should be clear that my personal assessment will be a strict one. Buying not just peripheral bonds but German and French ones as well does not automatically solve the problem of monetary financing." "One key aspect we need to consider is that of the redistribution of risks between member states. This issue persists even when buying bonds according to the capital key of the ECB because of the different risks of the respective sovereigns. Ultimately, the risk to taxpayers would be tantamount to that of a euro bond issue."

The Bundesbank has strictly opposed pooling liabilities with the introduction of Eurobonds in the absence of a fiscal union. To avoid a redistribution of sovereign risks, the ECB could opt to take a risk-weighted approach in a possible future programme that would see the Eurotower buy more bonds from triple-A rated countries than from lower-rated member states. However, this would appear both politically difficult and economically questionable. The Bundesbank has long argued that buying government bonds from all member states via quantitative easing would differ substantially from QE strategies in other countries where the central bank only buys the safest and most liquid available assets.

Asked whether there were enough sufficiently safe private assets the ECB could buy to have a material impact on price developments in the euro area, Weidmann explained that the Governing Council was still assessing the impact of various policy options. "Of course any private or public assets that we might buy would have to meet certain quality standards," Weidmann said. "But the overall question is one of effectiveness, costs and side-effects. We are currently discussing the effectiveness of these measures. The intended effects would then have to be weighed against the costs and side-effects."

Weidmann once again stressed that he was speaking of hypothetical scenarios and underlined that much of the weakness that remains in the euro area is due to structural problems that cannot be addressed by monetary policy. "I am of the view that as far as the credit supply to the real economy is concerned, a strict and credible comprehensive assessment [of bank balance sheets] is far more relevant than any debate about further monetary policy measures."

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