• Inaction on fiscal policy, reforms may keep natural rate low
  • Unconventional policy may have to be used more frequently

European Central Bank Executive Board member Benoit Coeure said unconventional monetary policy may have to be used differently and more frequently if governments don’t act to boost the growth potential of euro-area economies.

“We may see short-term rates being pushed to the effective lower bound more frequently in the event of macroeconomic shocks,” Coeure said Saturday in a speech at the U.S. Federal Reserve’s annual policy symposium in Jackson Hole, Wyoming. His remarks were posted on the ECB’s website.

“We will fulfill the price stability mandate given to us,” Coeure said. “But if other actors do not take the necessary measures in their policy domains, we may need to dive deeper into our operational framework and strategy to do so.”

While slowing growth and inflation present difficulties for central banks around the industrialized world, the Frankfurt-based ECB has particular cause to urge pro-expansion measures by the 19 nations that use the euro. High unemployment, political spats and banking systems loaded with soured loans are hampering the region’s recovery from a debt crisis that started six years ago.

‘Exceptional Situation’

“We face an exceptional situation where the real equilibrium rate is very low,” said Coeure. “All the monetary policy measures we have taken were a necessary response to this. They stabilized the euro-area economy and anchored medium-term price stability. But they were done on the assumption that low real rates would be temporary, because other policies would act in their fields of responsibility.”

The ECB’s benchmark rate is at zero, and the deposit rate is at minus 0.4 percent. The bank’s next rate-setting decision is in Frankfurt on Sept. 8.

Coeure, the ECB board member responsible for market operations, said that the central bank’s standing facilities, asset-purchase programs and other market interfaces have proven robust in the crisis. Still, the ECB faces the question of whether some of these tools should eventually be withdrawn or made permanent.

In particular, there is an argument for the ECB retaining the policy of accepting a wider range of collateral in exchange for bank funding given the greater demands on central banks following post-crisis liquidity regulation, Coeure said.

Side Effects

In the future the ECB may face the question of which operational target to pursue, if persistently low inflation means that policy rates remain close to or at zero. If current monetary policy settings linger into the long term, side effects will grow, Coeure said.

“If short-term rates are persistently pushed towards the lower bound, monetary policy has to focus on a wider constellation of rates across different maturities and asset classes,” he said. “What then is its target?”

Likewise, if the ECB continues to maintain a large balance sheet by purchasing shorter-term financial assets, that may have the effect of lowering long-term rates, exacerbating the low interest-rate problem, Coeure said. Financial stability may also suffer if unconventional measures last too long.

“The benefits of such measures have clearly outweighed their costs, but we cannot rule out a situation where the side effects are such that the negative consequences prevail,” Coeure said.

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