By David Barwick
SINGAPORE (MNI) – The European Central Bank will rethink its exit
from liquidity support measures if it has reason to fear a negative
economic impact, ECB Governing Council member Nout Wellink told Market
News International on Monday.
The head of the Dutch National Bank, speaking on the margins of a
conference here, confirmed that he remained “relatively confident” about
the continued validity of the ECB’s baseline scenario for growth despite
a recent spate of weak data.
Asked whether market interest rates might mount considerably in 4Q,
when over half of the ECB’s outstanding loans to banks expire, Wellink
replied: “No, I wouldn’t forecast a significant rise in market rates at
this very moment.”
Wellink declined to endorse or criticize Japan’s recent forex
intervention to weaken the yen, saying it was “their business.” However,
he expressed understanding for Japanese concern about the strength of
the currency.
Asked whether the continued dependence of peripheral Eurozone banks
on ECB lending was consistent with the continued unwinding of liquidity
support in early 2011, Wellink replied: “The moment we start our
unwinding process, we will take all relevant elements into account. So
if, at that very moment, we would be afraid of a negative impact on the
economy, we would most certainly reconsider our plans.”
It would be going “a little bit too far” to say that the risks of a
liquidity crunch in the Eurozone’s periphery clearly outweigh the
inflation and moral hazard risks of ongoing liquidity support via the
ECB, he said.
As to whether ongoing market tensions imply a higher probability
that the ECB will end up hiking interest rates before fully unwinding
special support measures, Wellink played his cards close to the chest:
“Let’s wait and see how things develop, and I can assure you that we
will react in the right way — in general, but always with our main task
— maintaining price stability in the euro area — in the back of our
mind.”
When the lion’s share of banks’ refinancing operations with the ECB
expire in 4Q, the monetary authorities “just will do what we think is
necessary under all circumstances, and we will closely monitor the
situation,” Wellink said.
With regard to the Eurozone economy, Wellink said that despite some
recent weak macroeconomic data, such as ZEW financial market sentiment
and German manufacturing orders, the baseline scenario of the ECB for
economic growth “is still okay.”
Against the backdrop of inventory cycles and the withdrawal of
fiscal stimulus, “it’s self-evident that there will be some slowing down
of the economy at a certain moment. But that’s not to say that the
underlying momentum disappears,” he argued.
European economic trends are heavily dependent on what is happening
in the Far East, where countries like Singapore and China are booming,
Wellink noted. But Europe will also benefit from what has already
happened at home, and in particular in Germany with its impressive 2Q
growth, he added.
“Even if this slows down — and that will happen — then there’s
still a positive impact of what happened in Germany on the rest of
Europe,” he elaborated.
However, Wellink cautioned that there is uncertainty with regard to
some of the larger countries in Europe and “how that situation might
affect the rest of the euro area.”
He dismissed the very concept of a “double-dip” recession as partly
a “statistical phenomenon” with little meaning. “What is more relevant
is: is the underlying trend still upwards? The answer is yes,” he said.
However, “is the underlying trend weaker than in the past after
recovery? The answer is also yes.”
Wellink added: “So the prospects for the medium term are less
buoyant than they were after previous recessions, but still going up.”
In any event, he said, “I don’t foresee a negative [quarterly] figure at
this very moment” over the medium term in the Eurozone.
Even if there is one, he emphasized, we should be cautious about
interpreting it: one cause could be a slow structural growth path due to
inventory movements. However, all in all “I am relatively confident that
the baseline scenario that we have published recently is still valid,”
he reiterated.
Although the economic situation in the U.S. “is a little bit more
difficult” to interpret, Wellink said that “on balance…I’m really not
too pessimistic. I think, looking at the data, especially the housing
market, that it might be true that the deterioration has bottomed out.”
The Dutch central bank chief minimized the threat of deflation at a
global level, observing that despite the relatively low levels of
inflation prior to the crisis, dramatic declines in growth still did not
result in a downward price spiral.
“So I don’t see a deflationary development in the short term,” he
said. Countries like India and China are “doing quite well”
economically, and “this puts pressure on commodity prices. So I think we
shouldn’t be too much afraid of deflation in this world.”
Nor is inflation a “real threat” in the Eurozone, he said, given
that spare capacity remains both with regard to labor and equipment —
though “perhaps less when it comes to machinery than some people think.”
“So there’s no immediate threat. The only threat for inflation
comes from commodity prices,” he said.
As to the yen, whose foreign exchange value has recently declined
as a result of intervention by Japanese authorities, Wellink noted that
“the strong yen is an element, of course, in the development of the
Japanese economy and also an element in the success of some export
sectors of Germany.”
He continued: “I can imagine that the Japanese are a little bit
worried about the strength of their currency. But I’m not going to
comment on whether they should have intervened or not, this is their
business.”
Asked whether or not he was satisfied with the euro’s present
level, Wellink replied: “I’m satisfied with our policies. I’m not a firm
believer in the effectiveness of intervening in currency markets. You
should only do so under very special circumstances. We have said in the
past that if it comes to interventions, then we would do it together
with others. But some other countries have different views.”
In other comments, Wellink said that fiscally troubled Greece “is
clearly still on track…At this very moment I think they are complying
with the rules of the game and what they promised us.”
–Frankfurt bureau tel.: +49-69-720142. Email: dbarwick@marketnews.com
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