Mersch Says ECB Leak Led to `Flights of Fancy' by Investors

  • ECB board member says two-tier deposit rate had no chance
  • Chief Economist Praet sees third stage of financial crisis

A media report that the European Central Bank was discussing a two-tier deposit rate led to unwarranted expectations about the scale of monetary stimulus planned, Executive Board member Yves Mersch said.

“This idea, which never had a chance, led to flights of fancy about an increase in the volume” of bonds the central bank would buy, Mersch said at an event in Frankfurt on Wednesday. That led to “positions being built up -- this is regrettable, but one should also avoid this in future.”

Yves Mersch
Yves Mersch
Photographer: Daniel Roland/AFP via Getty Images

The euro and bond yields jumped on Dec. 3 after the ECB cut its deposit rate by 10 basis points and President Mario Draghi announced an extension to quantitative easing that fell short of market expectations. Governing Council member Ewald Nowotny said on Wednesday that those expectations were “absurd” and caused by a “massive failing of market analysts.”

Reuters reported on Nov. 25 that officials on ECB working committees charged with examining further stimulus options in the face of too-low inflation had discussed a differentiated rate on the cash that banks park overnight. Mersch said the committee decided not to recommend the measure because it wouldn’t get a majority approval in the Governing Council.

Better Communication

ECB Executive Board member Peter Praet, the institution’s chief economist, said in an interview with Handelsblatt published on Thursday that investors had “exaggerated” expectations in the 7-day quiet period before the Governing Council meeting. ECB officials refrain from commenting on monetary policy during that time.

“There was speculation about a package of measures that had never been up for discussion,” he said. “What was agreed last week is exactly in line with what I proposed to the Council on Thursday, taking into account what was discussed in the committees.”

Credibility Risk

Bets on an aggressive stimulus package had risen in the run-up to the Dec. 3 meeting, in part because of statements by Draghi that policy makers would “do what we must” to spur consumer prices, and by Praet that there was a credibility risk if the ECB delayed meeting its inflation goal. Praet reiterated his concern in the interview, and said the world is into the “third stage” of the financial crisis.

“It started in the U.S., continued in the euro area and now it has reached the emerging economies,” he said. “It’ll take a long time to overcome. I would not be so concerned about this if the position of the euro area were more robust, but unfortunately it is still very fragile.”

Mersch said that while he personally hadn’t made any comments that inflated hopes of even more easing, communication could have been better.

“I know that communication is part of the job on both sides, and in retrospect one is sometimes cleverer,” he said. His remarks were embargoed until Thursday.

With an anticipated rate increase by the U.S. Federal Reserve on Dec. 16 approaching, Mersch said the ECB will maintain its accommodative stance, with “all the means that are at our disposal.” Some short-term volatility is possible in global markets around that decision, he added.

“The Governing Council is, with a very large majority, of the view that our program is effective and nothing further will be needed to reach’’ our goal of inflation just under 2 percent, Mersch said. “If the sky falls in, then we will still be in the position to resort to further accommodative policies.”

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