FRANKFURT (MNI) – A sharply rising euro joins the “addicted”
Eurozone banks as another obstacle blocking the European Central Bank’s
liquidity exit path, even as super hawk Axel Weber presses for new
withdrawal measures.
A potential second round of quantitative easing by the U.S. Federal
Reserve is putting upward pressure on the euro, which could harm the
Eurozone’s export base and force the central bank to keep a steady hand
for longer than previously expected.
Council member Erkki Liikanen Friday downplayed the perception of
diverging central bank policies, saying that “some commentators have
exaggerated the differences between the major central banks and their
policy stances.”
Still, the onslaught of comments by ECB policymakers on foreign
exchange rates, a topic they would normally be happy to walk away from,
leaves little doubt that the recent euro appreciation is a source of
worry. Ewald Nowotny warned explicitly that the euro’s strength is a
risk to the region’s recovery. “This climb is certainly not helpful for
the recovery,” he said.
President Jean-Claude Trichet earlier this week implied that a move
by the Fed could well have an impact on the ECB policy ahead. “We look
at everything” in assessing monetary policy moves, he said. “If there
were…any change in the parameters that come to us, we would judge
according to our own concept.” A new round of QE by the Fed — if it
comes to pass — would no doubt represent a change in parameters.
Nonetheless, Weber pushed aggressively once again to resume the
exit from non-conventional policy measures even as the ECB’s
counterparts in the U.S., the U.K. and Japan are headed in the other
direction.
At the current juncture, however, Weber appears to represent a
minority view in his insistence on exiting the ECB’s crisis-spawned
liquidity measures sooner rather than later. Additional monetary easing
by the Fed could leave him even more isolated.
Earlier this week, Weber called for an end to government bond buy
program aimed at easing tensions in the Eurzone’s periphery. “As the
risks associated with the securities markets programme outweigh its
benefits, these securities purchases should now be phased out
permanently as part of our non-standard policy measures,” he said.
His call was quickly rebuffed by Nowotny, and even fellow hawk
Juergen Stark has since confirmed that the bond buys will continue for
as long as necessary. In that context, Weber’s comments should be seen
as a personal preference to end a measure that he publicly rejected from
the outset — not as a shift by the Governing Council.
After previously calling for additional unwinding of extra
liquidity support measures in the first quarter of 2011, Weber said this
week that against the background of improving market conditions, “it is
necessary from a monetary policy point of view not to postpone the exit
from non-standard measures for too long, in particular since we always
emphasized it would be a state-contingent process.”
However, the addiction of some Eurozone banks to ECB funding has
forced the central bank to defer its exit from those measures before,
and that problem has certainly not yet been solved.
Latest data show that borrowing by banks in Greece, Portugal, Spain
and Ireland was little changed at E361.0 billion in September, as an
increase in Ireland offset declines in Portugal, Spain and Greece.
Weber argued earlier this week that weak banks should not stand in
the way of further unwinding measures, since financial institutions with
limited market access can simply place higher bids to ensure they obtain
the funding they need once the central bank returns to competitive
bidding.
At least until now, the majority of the Council appears to think it
would be too dangerous to pull the plug without an alternative solution
for those banks — and there have been no obvious developments
suggesting this assessment should change.
Vice-President Vitor Constancio told Market News International over
the weekend that the ECB is still mulling alternative measures to wean
weak banks off ECB liquidity, with no ready solution thus far.
On record low interest rates, Weber shares his colleagues views
that the current stance remains “appropriate.” Given a general consensus
on the Council that inflationary pressures remain muted, there is little
doubt that ultra-low interest rates are here to stay for some time.
Nevertheless, some interesting noises have come out of the
Eurotower recently, suggesting consumer inflation will not be the only
driver in future monetary policy considerations.
The central bank on Thursday presented a book, edited by Stark and
ex-ECB Vice President Lucas Papademos, that said some Executive Board
members are in favor of using monetary policy to lean against the wind
of asset price bubbles, which tend to be expedited by ultra-low interest
rates.
With future policy potentially driven increasingly by external
factors, it is even harder than usual to read the tea leaves based on
Council members’ comments alone. This was particularly true today after
Fed Chairman Ben Bernanke fell short of endorsing another round of
full-blown QE, even though he left the door wide open for it.
Markets are convinced that the Fed has already decided to press
ahead with fresh monetary easing. But Bernanke suggested that other,
less extreme steps are still on the table. Softer measures than the ones
expected by financial markets could quickly change the parameters yet
again.
In the tradition of the old Bundesbank, the ECB is clearly more
concerned than its U.S. counterpart about excess liquidity and the
potentially adverse impact it could have on the financial system and on
the wider economy. Still, the Fed’s printing press may yet force the ECB
to delay its exit — to the dismay of the new Bundesbank.
–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com
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