BERLIN (MNI) – Risks from the ECB’s asset purchase program are
outweighing its benefits and the securities purchase should now be
phased out permanently, ECB Governing Council member Axel Weber said
Tuesday.
In prepared remarks for a speech at the Shadow Open Market
Committee symposium in New York City, Weber argued that there is no
evidence that the ECB’s Securities Markets Program (SMP) has had any
significant impact on average Eurozone sovereign bond yields, on which
the ECB’s monetary policy has to exclusively focus as its main
transmission channel.
“But the SMP risks blurring the different responsibilities between
fiscal and monetary policy,” the Bundesbank president warned. “As the
risks associated with the SMP outweigh its benefits, these securities
purchases should now be phased out permanently as part of our
non-standard policy measures.”
Weber noted that the challenge facing monetary policymakers “now
and in the near future” is to get the timing and sequencing of the exit
from stimulus measures right.
This applies to both the nonstandard measures as well as the
monetary policy stance, and therefore, key interest rates, as the two
dimensions of the exit, he explained.
“While we are far from declaring the crisis over, it would be
unwise to postpone relevant considerations to the end of the crisis,”
the Governing Council member cautioned.
As regards the two dimensions of the exit, consisting of
phasing-out the non-standard liquidity measures and normalizing the
ECB’s “clearly expansionary” policy stance, there are risks both in
exiting too early and in exiting too late, Weber explained.
“I believe the latter are greater than the former,” he stressed.
Maintaining the accommodative policy stance for too long may risk
unanchoring inflation expectations, which is costly to reign in, he
asserted.
“For the time being, however, the policy stance remains
appropriate, since inflation risks remain low over the policy-relevant
horizon,” Weber conceded.
The two dimensions of the exit are independent and conceptually
separate, Weber elaborated. “Thus, a normalization of key interest rates
could in principle start before the phasing-out of non standard measures
has been finished,” the central banker said.
The phasing-out of non-standard measures mainly depends on the
situation in the financial markets and in the interbank money market in
particular, Weber said.
While improved conditions enabled the ECB to embark on a gradual
phasing-out of exceptional policy measures at the end of 2009, renewed
financial market tensions in early May forced the central bank to
reintroduce some measures that had already been phased out, he reminded.
“Looking ahead, the situation in the financial markets shows
continuing signs of normalization — despite some remaining volatility
and fragility,” the Bundesbank president member observed.
“Against this background, 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,” he stressed.
Given the ongoing normalization in financial markets, money market
rates have increased significantly “but smoothly without any monetary
policy tightening signals and the corresponding headlines,” Weber
remarked.
Still, despite the overall improvements in financial market and
money market conditions, some financial institutions continue to rely
strongly on the liquidity support measures provided by the ECB, he
pointed out.
In principle, the strong demand for central bank liquidity from
these financial institutions could lead to elevated tender spreads after
the return to a variable rate tender procedure, Weber said.
Banks with limited market access could place high bids in the
variable tender procedure, “possibly translating into somewhat higher
marginal and weighted average rates than were observed before the
crisis,” he elaborated.
Some observers are worried that such an elevated tender spread
could blur the monetary policy signal, which is primarily indicated by
the minimum bid rate, and thereby complicate the planned continuation of
the gradual phasing-out of those non-standard measures, Weber observed.
“However, I do not share these concerns to the same extent,” the
central banker said.
“While it seems plausible that banks with limited access to the
interbank money market would tend to place higher bids in auctions for
central bank liquidity, it should be equally clear that elevated tender
spreads would occur only due to the segmentation of the interbank money
market and must not be confused with a change in the Eurosystem’s
monetary policy stance,” he argued.
“In order to facilitate the return to variable rate tender
procedures, I believe a good starting point would be to have generous
allotment amounts in the main refinancing operations,” Weber said.
If these were substantially above the benchmark amount, this would
lead initially, in quantitative terms, to a quasi-replication of the
full allotment result, he explained.
“In such an environment, the immediate impact on money market rates
of the switch to variable rate tenders should be modest,” Weber
reckoned.
Subsequently, the gradual nature of the phasing-out process would
be reflected in a step-by-step reduction of the allotment amounts,
broadly in line with the estimated decline in banks’ demand for surplus
liquidity, he said. “Short-term money market rates would, over time,
remain close to the level of the key policy rate without undue
volatility,” the central banker asserted.
The ECB’s operational measures, though, cannot provide the solution
to the problems still plaguing that part of the banking sector which has
limited access to the interbank market, Weber argued.
“Shareholders and governments solely remain responsible for
resolving remaining undercapitalization and funding issues at individual
financial institutions and will have to undertake greater resolution
efforts, as nonstandard monetary policy measures are gradually being
phased-out,” he said.
In more general remarks, Weber noted that monetary policy has a
significant influence on the financial cycle, including booms and busts.
“Once market participants recognise that expansionary monetary
policy reactions are much stronger during downturns than the moves in
the opposite direction during upswings, adverse incentives are created,”
he said. “Hence, monetary policy needs to be more symmetrical.”
Such an approach would imply taking greater account of the implicit
risks stemming from lively money and credit growth, booming asset
markets and decreasing risk premiums, especially with regard to their
implications for price stability in the long run, Weber explained.
“In turn, this could imply extending the time horizon of monetary
policy beyond the standard projection horizon of roughly two years,” the
Governing Council member said.
He noted that this is already part of the monetary policy strategy
of the ECB. “The separate analysis of money and credit growth provides a
very useful toolset for the early detection of rising risk potential in
financial markets,” Weber said.
–Berlin bureau: +49-30-22 62 05 80; email: twidder@marketnews.com
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