The European Central Bank is conducting a comprehensive review of all its policy tools and has no immediate plans to increase stimulus even as market tensions mount, two euro-area officials said.
The review, mandated by the central bank’s six-member Executive Board, intends to assess the effectiveness of its measures, including the bond-buying program and long-term refinancing operations, and is scheduled to be completed in June or July, said the officials, who spoke on condition of anonymity because the deliberations are private. A third official said the ECB may not consider taking any further policy action until July, and that the bank sees current market tensions as a way of focusing politicians’ minds on reform efforts.
An ECB spokesman, who asked not to be named in line with the bank’s practice, declined to comment.
Bond yields in Spain and Italy have reached levels that last year pushed the ECB to restart its bond-purchase program, while the prospect of new elections in Greece has fueled concerns that the country may leave the 17-nation euro region. The third official said the ECB won’t do anything until after the next Greek election and that Governing Council members have been warned not to comment on the nation at all.
ECB President Mario Draghi said today that while the council’s “strong preference” is that Greece stays in the euro area, it won’t compromise on its principles to prevent an exit.
Greeks will return to the ballot boxes on June 17, Democratic Left leader Fotis Kouvelis said today, after talks on forming a government failed following an inconclusive election this month. Polls suggest a party that opposes the conditions of Greece’s international bailout, Syriza, may top the next vote, raising the chances the country will be forced to quit the euro.
A Greek exit could be “technically” managed yet would damage confidence in the monetary union, ECB council member Patrick Honohan said on May 12. A departure by Greece “is not necessarily fatal, but it is not attractive,” he said.
ECB policy makers have no immediate plans for policy action, the first two officials said. They will await the outcome of the next Greek election and also want to see the central bank’s new economic projections in June and a European Banking Authority report on bank recapitalizations, which is due to be published at the end of June.
Policy on Hold
There’s no willingness to cut interest rates or embark on additional non-standard measures, such as more long-term loans or re-starting the bond-purchase program, in the absence of a new shock, the two officials said.
The said that policy makers are instead focused on assessing the impact of the tools used so far in terms of financial stability, markets and policy transmission.
Some ECB policy makers are concerned that politicians are underestimating problems in Spain, one official said, adding that capital needs for the country’s banking system could be double what’s now envisaged.
According to this official, the ECB considers that Spain’s needs for capital should be met with the assistance of Europe’s bailout fund, the European Financial Stability Facility.
Spanish Prime Minister Mariano Rajoy said today there is a serious risk that investors will stop lending to Spain or charge “astronomical prices.” The extra yield they demand to hold Spanish debt instead of German bonds has widened to a euro-era record of 5.07 percentage points.
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