The European Central Bank won’t be ready to buy asset-backed securities any time soon, and there’s currently no need for large-scale bond purchases either, Governing Council member Ardo Hansson said.
“It’s worth preparing, it’s worth having more tools, but I don’t think quantitative easing is a tool that’s needed right now,” Hansson said in an interview in Frankfurt yesterday. As for an ABS purchase program, that “takes time and it’s not going to help with immediate issues -- it’s more of a medium-term plan somewhere down the road,” he said.
Hansson’s comments suggest that policy makers’ views differ on the timing and scope of any further ECB measures to fuel inflation and bolster growth. After introducing a negative deposit rate and targeted long-term loans last month, President Mario Draghi said officials are intensifying work for an ABS purchase plan, and QE “falls squarely” within the ECB’s mandate.
“Let’s focus on getting these existing, newly announced measures going,” Hansson said. “We haven’t set a firm deadline on an ABS program to say by date X it all has to be done and ready. I suppose if the contingency materializes over the space of a certain period of time, then maybe. But this is nothing that develops overnight.”
The ECB has identified sluggish lending to companies and households as key impediment to the recovery in the 18-nation region, and designed a program that links support for banks to benchmarks for credit supply to the real economy. The so-called TLTRO plan offers low-cost funds for as much as four years, and according to Draghi, could inject as much as 1 trillion euros ($1.35 trillion) into the financial system.
While Hansson said it’s difficult to estimate to what extent banks will take up the ECB’s offer, he’s “reasonably optimistic” that the measure will succeed in contributing to higher inflation rates.
“The final aim is to have an impact on prices but one of the transmission channels is the credit channel,” he said. “It hasn’t been tried so there’s maybe a bit more uncertainty than with other things that have been tried before. We don’t know much about the detailed impact as we might have known with some other instruments.”
Therefore, policy makers should wait and see how the stimulus impacts inflation, which is projected to rise toward the ECB’s goal of 2 percent by late 2016, Hansson said. Annual consumer-price gains stood at 0.5 percent in June. The ECB predicts they will average 0.7 percent this year and 1.4 percent next.
“Considering our forecasts, we think the package is pretty substantial and it is appropriate,” he said. “So I think unless something really unexpected happens that puts us on a different inflation projectory, then the idea of doing something more at this stage shouldn’t be part of our baseline assumption.”
Even so, Hansson signaled that further rate cuts, while only marginal in scope, aren’t off the table entirely. The Governing Council has pledged to keep interest rates at record lows for an extended period after cutting the benchmark to 0.15 percent and the deposit rate to minus 0.1 percent in June.
“You can’t rule out that there’s a little more you can do,” he said. “So is it really true that you’re at the floor? Not technically. But for all practical purposes you’re very close. So at that point, it’s almost semantic how you characterize that.”
Hansson, 56, was born in Chicago and gained his economics PhD from Harvard University. After serving with the World Bank in eastern Europe for a decade, Hansson became the institution’s chief of economic policy in China in 2008, before joining the Estonian central bank in June 2012.
With an economic situation meriting loose monetary policy for the foreseeable future, policy makers need to intensify efforts to have other tools ready to counter the emergence of any asset-price bubbles, Hansson said.
The ECB will gain the ability to require banks to hold extra capital against the effects of market corrections in November, as part of its macroprudential mandate, while national regulators will retain the ability to set limits on mortgage loan ratios.
“Given that these risks are probably growing, it’s maybe more important to develop the capacity, these instruments,” Hansson said. “Whether at a European level or a local level, someone has to actually go beyond the rhetoric of just mentioning this, and actually combine these issues of relatively accommodative monetary policy and the countermeasures to deal with financial stability risks.”