The European Central Bank should start discussing a broader range of measures as it seeks policy normalisation rather than just focus on how and when it will dial back stimulus, Governing Council member Ardo Hansson said in a Reuters interview.
Hansson, Estonia’s central bank governor and a moderate hawk on the ECB, said robust euro zone growth will allow the ECB to dial back stimulus but normalisation will be gradual.
He said the bank’s next move should be a set of measures that go beyond a decision on asset purchases, among them changing forward guidance and adjusting reinvestment policy.
“We need to have more than just an inordinate focus on the asset purchase programme,” he said. “Now we link our communication to asset purchases… there are other ways to be specific that doesn’t tie your hands to only one instrument.”
Investor focus should shift away from monthly asset buys as the ECB’s huge balance sheet and other tools provide the bulk of the necessary accommodation, Hansson, 59, said.
With the euro zone economy growing for the 17th straight quarter, ECB policymakers will debate in October whether to curb stimulus measures, even if inflation remains weak and forces the bank to keep monetary policy relatively easy for years to come.
“What I would advocate is a somewhat broader recalibration,” Hansson, referring to having discussion outside simply rolling back asset purchases.
“We have a range of instruments already under implementation. And maybe a few that we could in addition bring to the table for consideration.
“There’s various refinancing operations and the details of forward guidance could be more precise about interest rates,” Chicago-born, Harvard-educated Hansson said.
Another option worth debating, he said, would be making the ECB’s guidance symmetrical, not only stipulating the bank’s willingness to increase monthly asset buys if the outlook changes, but also to cut them.
The ECB could also make better use of its reinvestment policy as the bank is already spending large amounts from maturing debt, yet it says too little about these buys.
“If we are doing it and it is an important part of the actual policy, but we are not telling anyone about how big it is, we are missing part of the story and the policy looks less accommodating that it actually is because a part that is kind of under water,” Hansson said.
Markets expect the ECB to cut its asset purchases by a third from January but Hansson warned against a binary focus on monthly flows.
“We have bought roughly two trillion euros, so at the margin plus 10 or minus 10 in one direction is less important that the fact you have this very large excess liquidity which is anchoring the shorter end of the yield curve and which will be around for a long time,” he added.
Hansson also played down concerns about the euro’s firming, a risk flagged by ECB President Mario Draghi earlier this month.
“It (the exchange rate) is well within the historical range and the euro area has a current account surplus of some volume,” Hansson said.
The biggest problem for the ECB and many of the world’s biggest central banks is that inflation is showing little sign of moving higher, even as growth motors ahead, consumption is robust, and unemployment is falling faster than expected.
Migration, technological advances, hidden slack in the job market, and globalisation, which has made both supply and demand more international, are the main culprits and Hansson warned that resolving these will take years.
“The objective economic reality is that it’s going to take a bit more time (to raise inflation) for reasons we don’t control,” Hansson said.
Yet missing the cue to tighten policy might be costly, Hansson warned, dismissing arguments from some that given Europe’s lengthy crisis and the cost of acting too early favours taking longer to decide.
“There is a discussion whether you should err on one side or the other,” Hansson said. “Prudence doesn’t mean you wait too long too, because then if the fundamentals start picking up and if you have been too cautious, then you have to play catch up later.”
Source: Reuters (Reporting by Balazs Koranyi and David Mardiste Editing by Jeremy Gaunt)